If your dollar feels like it’s not going the distance you recall pre-pandemic, you’re not imagining it. Inflation continues to affect Americans and small businesses, and with a rate of 7.9%, 2022 marks the highest upswing the U.S. has experienced in 40 years.
What is inflation and does it affect the cannabis industry?
Forbes may explain it best by defining inflation as a rise in prices during a decline in currencies purchasing power over time.
The current inflation rate increase is due in large part to:
- The pandemic and supply chain issues that upended global trade and commerce
- Global strife that is significantly impacting worldwide oil and gas prices
Either of these circumstances on their own would cause problems. But both occurring concurrently has had a compounding impact that is expected to last for some time, meaning businesses and customers have to contend with:
- Increased raw material costs
- Higher global freight costs
- Ongoing labor shortages
- Increased wages
They say inflation affects every business, but what about businesses in the cannabis industry? Where other businesses are raising prices to secure their margins and profits, the average cost of marijuana products per milligram has reduced by 16.7% for marijuana flowers, 11.8% for vape products, and 12.4% for THC.
But experts warn that it’s no time for a victory lap.
The Cannabis Industry Is Affected
Cannabis manufacturers are facing colossal transportation and energy costs because of inflation. This, in turn, is being passed onto and affecting cannabis retail sectors. Cannabis dispensaries are facing increased costs across its distribution and delivery for the same reasons.
Overall reduced consumer spending and smaller basket sizes due to inflation’s increased prices has reduced sales. We can conclude that cannabis businesses feel the impact of inflation because of the increasing cost of living, transportation costs, and individual salaries, even if it’s not the same effect as on other industries.
Inflation not solely to blame
Inflation is not the only factor that contributes to the current performance of the cannabis industry. The cannabis industry is governed by a unique set of rules impacting how inflation affects the industry. Energy prices differ in every state, depending on whether oil and gas are imported.
Different states in the U.S. have different cannabis legislation laws. States with more mature cannabis legislation like Colorado have lower wholesale cannabis prices of less than $1000 per pound. On the other hand, in states like Massachusetts, where the legislation is relatively young, the wholesale price of cannabis is at least $3000 per pound.
Consider the barrier to entry to specific markets as well. Due to high compliance requirements, the cannabis industry is incredibly overwhelming for new incomers. But as the barriers to entry reduce in line with the maturing market, the industry becomes more competitive. This, in turn, results in diminished prices and margins on the retail and wholesale levels.
Another factor that might protect the cannabis industry from inflation is the adoption of sustainable energy sources, meaning cannabis firms depend less on non-renewable resources of energy and more on modern energy-saving equipment.
Therefore, inflation is not entirely the problem. Instead, other economic factors in the cannabis market significantly impact the cannabis price. As a cannabis business owner, you should be prepared for anything.
Preparing For Anything
While debate exists on whether cannabis businesses can endure inflation, the probable answer to the question is yes because people rely on cannabis products even when they are broke. As such, the cannabis market is expected to remain resilient.
But this doesn’t mean that some businesses will not be affected by the rising economic costs. Struggling companies must, therefore, start to prepare for anything, especially inflation.
Understand your position
This means looking deeply into your profits and margin forecast based on your 2021 sales. The goal is to determine where you are, how the current price increase affects your revenue and margins, and whether you maintain consistent growth in your cannabis margins.
- What is your cost of goods sold (COGS)?
- Are you on the verge of increasing your labor costs?
- How do your profits compare to last year?
- What is your current product price, and is there a need to increase it?
When you add your COGS and percentage profits from last year, you will get your profit projection for 2022. Consider the gains you wish to make this year and determine your margins.
When to increase your prices
Don’t be shy to increase your prices if your cannabis business demands it. As we mentioned, your customers expect it. Therefore, you are unlikely to face significant resistance. And with your COGS, you can tell whether you should increase your prices for 2022 or not. You can also use the consumer pricing index (CPI) rate to justify the price increase.
Protect your cannabis business
An accounting ERP software takes the burden of managing your finances and accounts for you. Your CPI, for example, might be higher if you pay freight costs. Inventory fulfillment and turnover might also be challenging, forcing you to adapt by incorporating other transportation methods.
But an ERP solution will automatically account for these inflation changes, workforce fluctuations, and your entire business finances. Instead of worrying about inflation, now you can stay informed and propel your cannabis business toward growth.
Is inflation affecting the cannabis industry in 2022?
Yes. The increasing cost from factors like transportation, delivery, and energy does affect the cannabis industry. But other factors also contribute to the overall wholesale and retail pricing of cannabis products.
Why is the price of cannabis products reducing?
Factors like maturing legislation in different states, reduced barriers for new producers to enter the industry, and increasing competition are primarily to blame for current dips in cannabis prices.
How can ERP software help a cannabis business during inflation?
An ERP solution has accounting functions like tax and financial reporting and real-time cost analysis that help manage cannabis cash flow, revenue, and profit margins amidst changing global economic costs and prices.