Cannabis and Inflation: What Costs Are Going Up

Starting a new business is never easy, and the financial climate in cannabis brings its own set of challenges. From inflation to taxes, it seems the industry can’t catch a break since being coined an “essential business” and undergoing an inordinately huge bump in sales just a few years ago. Keep in mind, the cannabis industry isn’t alone in its inflationary woes—rising costs abound nationwide and investment funding is at a low across the board. And while the most mature marijuana markets have been hard hit, some are still hitting sales records and there are signs of stabilization and continued growth on the horizon.

For new and expanding cannabis businesses, the simplest way to overcome inflation is to understand the particular financial landscape of your business type, in your state market, with your specific capital costs, products, expenses, and employees. In a financial pro forma, you can develop an acute understanding of fiscal restraints prior to launching your business, which will allow you to navigate investor pitches, license applications, community relations, business strategy, and banking with confidence. Savvy owners also use financial modeling to test high and low market scenarios, various startup strategies, cost-saving methods, and pathways for potential expansion.

Inflation affects all expenses, though differently at each stage of business. For new businesses, capital and initial expenses are higher, and for existing businesses, ever-growing overhead and operating costs leave them fighting for a margin. Businesses who started by the seat of their pants are cleaning up their acts and streamlining operations, getting bought out, or worse. For states rolling out cannabis programs—like Minnesota, Kentucky, and Delaware—entrepreneurs have an opportunity to learn from those before them

Application and License Fees

One silver lining, application fees are on average the lowest we’ve ever seen. Social Equity discounts, as well as the low price tag on lottery-style license applications, are main causes. States like New York and Maryland charged as low as $1,000 for applicants in their late 2023 lotteries. Licensing and renewal fees are steady, though extreme fees like those over a million in Florida have recently held up to legal challenge.

Property and Infrastructure Costs

While cannabis prices plane out in mature markets nationwide, the cost of land, buildout, and lease rates continue to rise. With interest rates sky-high and continued competition in new jurisdictions, prime real estate can be a challenge to secure. Strategic financial planning is crucial to navigate these challenges, particularly in anticipating and managing capital expenses.

Understanding buildout costs per square foot is essential for accurate budgeting and avoiding fiscal surprises during the construction phase. Further, optimizing facility usage, whether through efficient current operations or planned expansions, can maximize the return on investment for property expenditures. In addition to capital expenses, consider related ongoing infrastructure costs—such as rent or property tax, security measures, maintenance, and utilities.

Labor Expenses and Wages

Labor costs are slow and steady on the upswing, and you can count on giving your employees a raise for inflation every year. So, how do you stay ahead of the game? The best preparation involves building comprehensive financial forecasts that account for initial and ongoing expenses in recruiting, staffing, training, and competitive benefits. Proper financial modeling will classify your staff correctly based on independent contractor versus employee status. And with turnover rampant in cannabis, you’ll want to account for additional employee retention practices like continuing education, professional development, perks, and rewards.

It’s not all doom and gloom—there are strategies to find wiggle room in your budget. The most common culprits for money mismanagement include: inventory, ancillary vendors, and suppliers.

Data-Driven Pricing and Inventory

Through thorough financial modeling and regular analytics reports, businesses can gain insights into consumer preferences and market trends, allowing them to adjust pricing strategies accordingly. A data-driven approach ensures that pricing remains competitive and purchaser needs are met while also reducing carrying costs and ultimately contributing to cost savings.

Building Strong Relationships with Vendors and Suppliers

Fully utilizing existing vendors and suppliers is another key tactic for cost-saving. By cultivating strong relationships with reliable vendors, businesses negotiate favorable terms and pricing agreements, potentially leveraging volume discounts with preferred suppliers to further optimize procurement costs. Ask for recommendations and introductions from advisors or connections you trust to connect with other licensed cannabis businesses and ancillary service providers, such as insurance, licensing, security, and packaging—and don’t underestimate the power of networking!

Financial Assistance and Grants in the Cannabis Industry

Even if your main financial strategy depends on outside investment, state-provided financial assistance and grants can help mitigate cost. Currently, in states like Maryland, hopeful licensees are offered numerous grants and programs to assist them in getting started. I’m not one to turn down free money, but for planning purposes, be warned that state-promised financial assistance is often smaller and later than expected.

Anticipated Regulatory Changes Affecting Costs

Anticipated regulatory changes can have a profound effect on costs within the industry. For instance, the potential rescheduling of cannabis at the federal level could lead to opportunities for expanded research, investment, and market access, as well as alleviating heavy Section 280E tax burdens allowing for improved profitability.

Market Trends Influencing Inflation Dynamics

Market trends play a crucial role in shaping inflation dynamics within the cannabis industry. Exuberance and overproduction, coupled with external factors such as the global pandemic crisis, have contributed to market volatility and pricing fluctuations in recent years. To mitigate risks associated with inflation and market correction, cannabis businesses should base their financial projections on data from comparable markets and establish robust, dependable financial models that account for various scenarios and contingencies.

In an industry where tight margins and escalating competition demand precision and foresight, collaborating with seasoned experts is pivotal for success. At both Canna Advisors and Alpharoot, we offer unparalleled expertise in navigating the complexities of regulated cannabis, empowering businesses to combat rising costs and optimize their potential for growth.

Whether you’re a startup seeking to enter the market or an established player looking to expand operations, our collaborative approach ensures that you’re equipped with the tools and expertise necessary to thrive in today’s dynamic cannabis industry. Take the first step towards success by reaching out to Canna Advisors and Alpharoot today.