Cannabis Knowledge & Insights

Supply-Chain Shortages Impact Cannabis

While National supply-chain shortages continue to impact businesses around the US, the cannabis industry is no different. Although current legislation prohibits the transportation of cannabis from state to state, cannabis operators are experiencing shipping and product delivery delays and rising costs on raw materials, equipment, and more. 

As a result, right now may be the best time to update current strategies around purchasing patterns to combat rising costs going forward. 

Impacts of Delivery Delays for Cannabis Operators

While work shortages in the trucking industry continue to increase, shipping times delay the delivery of many raw materials used by cannabis companies in all verticals. Operators are experiencing product backorders and delays on many raw materials needed for cultivation, resale, manufacturing, transportation, etc. 

The delays are causing many problems, including delayed cultivation or less efficient grows, prolonged construction of retail locations or expansion projects, and increased costs associated with the lost revenue rising expenses. 

Effects of Product Shortages for Cannabis Businesses

Many cannabis companies are struggling with the global microchip shortage. Why? Because microchips are necessary parts for equipment for ancillary services such as lighting, heating, and cooling. 

In addition, the shortage is causing more delays and higher costs for those purchasing, updating, or fixing equipment. Manufacturers and service providers are absorbing much of the cost by passing it down, which is, in turn, narrowing profit margins for cannabis businesses. 

Inflation is Shrinking Profit Margins in Cannabis

Increasing expenses adversely affects the bottom line for cannabis operators in every vertical. Packaging materials such as paper and some plastics rose by 25-60% in the last year. In addition, national labor shortages and growing popularity around the remote workspaces have hit the quick-service industry and other low-paying jobs the hardest. Cannabis operators are finding themselves with increasing levels of turnover and raising wages to stay competitive with the rest of the market. 

Prices for natural resources, including steel and copper, are also soaring. Manufacturers of devices such as vape pens are running into issues with the rising cost of copper. Although many of these products are American made, the cost of transport and product expense continues to rise.

While not all cannabis operators are directly impacted by the global supply-chain issues, the indirect hit is a continuous issue that operators need to consider when strategizing for future business decisions. For assistance with your business plan, reach out to our strategic experts for advice on how to best strategize for the future.  

3 Ways to Cut Costs For Your Cannabis Business

Option #1 Passing Down Costs to Customers 

While most operators are absorbing the additional costs by increasing prices for their customers, there are some things to consider before upping your prices. Increasing prices may impact your business in the following:

Customer Retention  

Once customers are driven away, it’s hard to ever win them back. They start shopping elsewhere and lose loyalty to your brand. Customer retention is an important factor when deciding how much to increase pricing. Consider your market, demographics, competition, etc. 

If you do decide to increase pricing, consider how much you can afford to absorb into the business. If you need help analyzing your financials, our team can provide customized breakdowns for your dispensary. Be sure to increase prices marginally to test customer feedback and results. 

Bottom Line Profits

If your customers start to shop elsewhere, your profits will go down. Some consumers may try the local competition for a while and come back eventually because of strong brand power or superior service, but it also may open the floodgates for people to start shopping in other dispensaries and your shop to get the reputation of being “overpriced”. 

The best way to prevent this type of mass exodus is to know your financial situation ahead of time. By analyzing your finances, you can have a better idea of what your business can sustain and how to create your strategy above your break-even point. 

Option #2 Purchase Cheaper Products 

Purchasing cheaper products may end up being lower quality. Lower quality products can hurt your brand and can end up breaking or being less valuable over the long term. Lower quality flower, edibles, or vape pens could ultimately end up driving away buyers.

Or they could be a great money saver, changing up your customer’s packaging could be a quick and cheap way to save money. Can you switch from plastic or glass containers to plastic bags? Customers will care less about a change of packaging than a change of product quality. 

Option #3 Develop New Partnerships

By creating partnerships with domestic manufacturers and vendors, you may be able to save on international shipping costs. While these avenues may have been more costly before, global shipping costs have increased dramatically over the last year. 

We recommend a thorough review of your options as things may be more reasonable now.

Final Thoughts

Worried about the impacts of supply-chain shortages on your cannabis business? We can help! For assistance with discussing your options for cutting costs, reach out to our team of financial experts at GreenGrowth CPAs. We are here to help your cannabis venture through any level of the accounting and tax filing process. We employ several financial programs that can assist the company with its fiscal responsibilities including, tax planning and compliance, outsourced CFO support, audit preparation, tax controversy support, and much more.

For recommendations and assistance with tax planning and accounting services, schedule a free consultation or contact us at 1-800-674-9050.