- Inflation has only a nominal impact on retail cannabis demand
- While states have seen a drop in demand, this drop is only a return to pre-pandemic consumption levels
- Cannabis demand has remained constant and predictable during this period of heightened inflation
- The data reflects this, both in clinic visits and spending per transaction
- This strong demand is not surprising and is similar to the resilience of cannabis demand during a recession.
- The decline in cannabis sales in the United States can be explained by two factors:
- A general return to work
- Cannabis product price deflation
Price inflation is at a level not seen since the 1980s
Inflation can be understood as a general increase in the price of goods and services. Inflation has been a hot topic of conversation for most of this year, in the news, at meetings and at conferences. Inflation rates, which are currently at 8.5%, have been discussed in the multiple national and state economic advisory groups that I support. Many of these conversations revolve around the impact of rising inflation on aggregate market demand and how long the effects will be felt.
Inflation means reduced purchasing power, fewer jobs, less capital investment
One of the consequences of inflation is that consumers have less purchasing power. If consumers pay more for basic necessities like food, gas, or lodging, they have less money to save or spend on other items like concert tickets, restaurant dinners, and goods. and general services. When consumers reduce spending, there is a ripple effect: the economy slows, fewer jobs are needed, and fewer business investments are made.
The impact of inflation on consumer spending
The current post-Covid cycle is evolving differently from other economic cycles. Transfer payments made by the federal government during the pandemic have increased household wealth and maintained consumer purchasing power. As goods and services during the pandemic were in short supply, prices soared, and even with these higher prices consumers were still able and willing to pay. This cycle has pushed prices even higher, resulting in the highest level of inflation since the 1980s. Data now shows that consumers are starting to cut spending as they focus more on food, fuel and shelter . Other sectors are now affected by this shift in consumer sentiment.
Inflation has a nominal impact on cannabis demand
As expected, consumer demand for cannabis has been resilient. One of the most common questions Whitney Economics has received recently is whether or not inflation has had an impact on consumer demand for cannabis. The answer to this question is no.
Cannabis revenues are falling – but not because of inflation
Cannabis sales are down, but that’s not the result of inflation. The decline in demand for cannabis is actually a function of two general elements:
• Return to work and school
• A general DEFLATIONARY environment for cannabis products
With fewer opportunities to consume cannabis throughout the day and falling prices for most cannabis products, sales numbers are down in the United States. It is not a surprise.
Back-to-work policies drive down demand for cannabis
During the pandemic, the demand for cannabis exploded: consumers were able to consume at home and at work. In some states, such as Oregon, demand for cannabis grew 35% year-over-year in 2020 and 2021. In a September 2021 article, Whitney Economic correctly predicted a return to growth rates of before the pandemic due to cannabis users returning to work in the office. That indeed appears to be the case, as Colorado suffered its first year-over-year revenue decline. The data suggests that demand from Oregon is also weakening.
Source: Colorado Department of Revenue
Average basket size is returning to pre-pandemic levels.
During the pandemic, average sales per transaction have increased significantly. Cannabis users generally pooled money in their households and bought more per visit. This was not a phenomenon unique to cannabis. Starbucks and other retailers have seen a similar pandemic shopping pattern. Starbucks saw a significant increase in average transaction amounts in 2020 and 2021. Now that there are fewer opportunities to consume cannabis (back to the office), average basket levels are lower and slightly higher than pre- pandemic. This shows that consumers are still spending on cannabis, despite higher inflation rates, but the consumer is not visiting cannabis retailers as often and spending less when they do.
The chart below shows the cannabis industry’s favorite day of the year: 4/20. Here, Whitney Economics has included data for this particular day for fun, but data on other dates shows a similar pattern of cannabis purchases returning to pre-pandemic levels.
Commodity price deflation also contributes to lower sales
The majority of the drop in sales is related to back-to-work policy changes, but another aspect of the drop in demand is due to product price deflation. In nearly every product category, prices saw double-digit price declines in 2021. These price declines had a significant impact on overall revenue. For example, the cannabis flower market share accounts for up to 55% of cannabis revenue in the United States. The data shows this with a 15% reduction in price. Extrapolating and holding all other factors equal, a 15% drop in flower prices would result in an 8.25% drop in overall US sales. Most analysts attribute the decline in sales to inflation, but price deflation could actually have an even bigger impact on sales revenue. The impact of deflation on sales should not be overlooked.
Cannabis consumers are very disciplined about their budgets
Cannabis consumers are very consistent when it comes to allocating money to cannabis products. A large percentage of cannabis demand comes from a small group of frequent users. Moreover, the demographics of the typical consumer show that these consumers have disposable income and can absorb price increases. As such, cannabis is fully ingrained in their lives and inflation will have little impact on these consumption habits. Whereas
some part-time users may reduce their cannabis expenditures, the impact on overall income is minimal. Therefore, the demand for cannabis is not significantly affected by general inflation in the United States. This idea is consistent with research published by Whitney Economics on the impact of the pandemic on the demand for cannabis, ( https://whitneyeconomics.com/report/cannabis-in-the-new-economy-how-cannabis-investment-could-grow like-a-weed-in-the-coming-recession-may-2020 )
Cannabis demand is resilient: inflation will not impact consumer demand
In sum, the decline in cannabis retail revenue is a function of back-to-work policies, combined with price deflation of cannabis product offerings. The impact of general price inflation barely moves the needle on demand. However, this does not mean that headline inflation has no impact on the market.
In our next article, Whitney Economics will examine the impact of inflation on sales ramps in states with recent and upcoming rollouts of legal cannabis regulation. This is where inflation has a real impact and could hurt the future growth of the cannabis industry.
Beau Whitney is the Founder and Chief Economist of Whitney Economics, a global leader in cannabis and hemp economics consulting, data and research. Whitney Economics is based in Portland, Oregon.