VIDEO: Can Pot Stay High While Inflation Runs Hot?
Welcome to my latest “Weekly Weed Report” video presentation. Below is an edited transcript. My video provides additional details.
How bad is inflation? To quote an old pop song: it’s hot hot hot.
The U.S. Bureau of Labor Statistics (BLS) reported last Friday that the headline CPI in May rose 8.6% over the year versus estimates of 8.3%. That’s the highest rate since 1981. Month-over-month, the CPI rose 1%, versus expectations of 0.7%.
Core inflation (excluding the volatile food and energy sectors) was up 0.6% in the month and 6.0% over the year.
It begs the question: how is inflation affecting marijuana consumption and sales? It seems counterintuitive, but the price of cannabis actually has been going down. More players are entering the industry; companies are generating better economies of scale; a greater volume of weed is entering the marketplace; and legalization is making cannabis less “rare.” (See the video for charts.)
The U.S. Cannabis Spot Index has fallen to $1,114 per pound, but the average deal size has remained roughly steady. As food and energy costs soar, cannabis prices are moving in the opposite direction.
In a new report, Cannabis Consumers in America, New Frontier Data found that price is indeed important. However, if you look at the nuances of the findings, you’ll see suggestions that marijuana is inflation and recession resistant.
Inflation ranked as the third-most important factor, among 61% of consumers, when making a purchase decision. The report states:
“For most consumers, cannabis is a low-spend/high-frequency purchase. Nearly half (45%) of current consumers acquire cannabis at least once per week, with most (67%) among them spending less than $100 per purchase. The high-frequency nature of those purchases, coupled with high levels of expressed interest in new products, creates significant opportunities at each touchpoint for retailers and brands to engage and educate consumers.”
Marijuana sales figures year to date have remained on a growth trajectory, despite headwinds such as inflation. The U.S. cannabis industry is expected to reach $32 Billion in annual sales by the end of 2022.
New Frontier found that marijuana purveyors are successfully relying on a technique that’s common in mainstream consumer marketing: they’re counteracting inflation in subtle ways that consumers generally don’t notice.
Problem is. the legal pot industry has its hands tied on weight and size. Half an ounce of marijuana flower, for example, is 1/2 an ounce however it’s packaged.
Regulated legal markets universally require a pre-established level of tetrahydrocannabinol (THC) in any given package. There’s no wiggle room for cheating. Track-and-trace programs in several states mandate the careful weighing of marijuana and the gauging of its THC content throughout the supply chain, from farm to dispensary. These assessments must be conducted by independent entities.
With rising prices for food and gas, consumers are spending less, even on staples. For many individuals and households, marijuana is considered a staple. But they’re prioritizing, and marijuana remains a high priority.
Marijuana sellers are maintaining profit margins in an inflationary environment, by giving consumers less, in subtle ways. How are marijuana sellers giving the consumer less, without incurring pushback from buyers and regulators? Here are some of the steps they’re taking:
- Reducing package sizes or types.
- Using one type of box that can be resized multiple ways.
- Renting smaller storefronts.
- Negotiating better terms with long-term, loyal vendors.
- Reducing personnel by automating or outsourcing repetitive tasks.
- Reducing operational hours.
Are these methods common to the mainstream consumer industry? Yes, of course. But the fact that marijuana companies are deploying them is further proof that marijuana is becoming just another business. It’s also important that marijuana tends to occupy a high priority spot on customer shopping lists.
Research group YouGov conducted an online poll, which involved nearly 5,400 people. Fifty-three percent said medical cannabis providers should be regarded as essential, 26% said they shouldn’t, and 21% said they didn’t know. The poll was taken during the worst of the pandemic in March 2020, when state governments were trying to determine which industries could stay open because they are “essential.”
The takeaway is that marijuana is weathering hot inflation better than most industries and should emerge even stronger when inflation eventually wanes.
Editor’s Note: There’s a difference between gambling and taking a reasonable risk. But how can investors draw that distinction? The line is especially blurry with marijuana companies.
Marijuana is among the hottest growth opportunities that you’ll see in your lifetime. If you pick the right pot stock, you could reap stupendous gains. But that’s the key: picking the right stock.
That’s why I urge you to read my new book: The Wide World of Weed and Psychedelics. It’s your definitive guide for making money in the thriving cannabis and psychedelics industries. Click here to get your free copy.
John Persinos is the editorial director of Investing Daily.