- Annual growth in the United States’ Cannabis Industry estimated to be 26%
- This high amount of growth is leading to significant oversupply in mature markets
- Oversupply is reeking havoc on the suppliers and retailers, as price is significantly decreased
With the new year swiftly behind us, exciting changes lie on the horizon for the cannabis industry. New licenses are being issued in developing markets like Michigan’s transition to regulated medical. With further entrenchment in established markets like Colorado and Washington, the possibilities for 2018 remain as impressive and uncertain as ever.
Arcview Investor group estimates annual compound growth for the cannabis industry as high as 26%, showing the United State’s cannabis industry is on firm footing. It is interesting to note, however, that much of the market’s success may lead to imminent implosion.
Mature medical markets are seeing some level of price compressions in recent years and recreational even more so. The tight regulations on medical markets limit licenses and distributors, keeping the supply chain in a relatively consistent state. The recreational market, on the other hand, moves through major fluctuations of supply, which affects prices. A major example of this is the oversupply reeking havoc on the Oregon recreational market. When markets cannot be stabilized effectively commoditization will quickly become inevitable.
What is Commoditization?
Commoditization is defined as a state within a given market in which the public begins to see all products as simple commodities, despite their brand uniqueness or other distinguishing qualities. This causes retailers to compete against each other on price as the quality of the products becomes equal or at least indistinguishable to consumers.
Many readers may remember the gas wars of yesteryear, wherein gas station purveyors would drive themselves into extinction through the dropping of prices to outdo competitors across the street or down the road. Often these drops would go well beyond the level of sustainability as companies hoped to outlast the competition. It is clear that such approaches offer a losing proposition to both sides involved.
Will Commoditization Impact the Cannabis Industry Michigan?
While industry analysts are estimating that such commoditization in the cannabis industry is inevitable, the rate at which it approaches this position varies from state to state. Without unique product offerings that differentiate producers from their competitors, margins must soon become to keep themselves on the shelves or retail outlets.
As of late, Washington has become a prime example of a state facing commoditization by hastily entering into this ever-developing market. With analysis placing the influx of available product up 60% over 2016 according to Seattle’s Straight Line Analytics, supply now drastically outweighs demand.
Suppliers and retailers in Washington and Oregon are commanding prices for an ounce of cannabis flower for roughly $40. For comparison, in Michigan ⅛ ounce of cannabis is available for $35 or $45 depending upon quality. Most of this over development has been the result of an unlimited number of licenses available for aspiring producers, and the ability to transfer licenses when a business fails.
What Needs to be Done?
As with the gas wars, retailers find themselves competing on price with each other for the same quality goods, thus forcing themselves into a negatively trending spiral towards failure. With some growers reporting wholesale pricing under $500 per pound, the need for change in order to aid the floundering market is imminent.
In an industry developed for so many years underground and away from prying eyes, such an environment has created a spirit of selfish mistrust. This spirit extends to the governing bodies, but to each other as well. The industry that started carrying a fight against “the man” is now engaged in a dog fight against one another. Such a divided market must choose to work together, or wither alone.
Small entities must collaborate to become larger players, or else soon find that someone else has had the foresight and vision for the future that they lacked. It is this, combined with the necessity to innovate and offer new and unanticipated products that will lead cannabis into a new era. This era will be founded on collaboration and a desire to push the global initiative as one force for good in the world.