Moving Markets: Declining Economic Conditions in Western States Lead to Curaleaf Exit
February 8, 2023
Recent economic conditions in mature and established cannabis markets have led major players to bow out due to oversaturation in search of more opportunistic emerging markets. Curaleaf Holdings, a multistate operator, recently pivoted its business strategy by shutting down all California, Colorado, and Oregon operations. With all three of these states experiencing declining wholesale cannabis prices due to cultivation oversupply, Curaleaf has decided to exit these states and reduce its payroll by about 10% overall. Curaleaf is not the only big cannabis company to experience job cutbacks in recent months. Oregon-based Dutchie, California-based WM Technology, and Colorado-based Akerna Corp. have all scaled back their workforce as a cost-saving measure.
The California market has been troubled by several contributing factors, making it a particularly challenging market for a wholesale cultivator. After a period of wholesale cannabis price decline due to market oversupply and competition, prices have leveled off and even increased slightly. However, despite this uptick in price, some farmers still choose not to grow or renew their cultivation licenses as production costs exceed the wholesale price for outdoor bulk cannabis. Additionally, the thriving and unrestrained illicit cannabis market in California creates even more competition, with the illegal market not being tied down by the regulations or having their margins eaten up by the taxes and fees accompanying a legitimate cannabis business. Furthermore, without having a cap on cultivation licenses, the price floor for wholesale cannabis can drop much lower, particularly where California has limited retail space to sell the cannabis surplus.
These economic conditions have caused Curaleaf to lose its appetite for California, but they remain hungry and in search of other opportunistic emerging markets with less competition. In their investor update, Curaleaf indicated that the California exit would allow them to devote more resources to future growth prospects, such as the emerging market of Europe. Only time will tell if relocating to emerging markets will be the correct decision as opposed to setting down roots and weathering the economic ebbs and flows.
Will this create a trend?
The decision to relocate out of the western territories could initiate a trend in cannabis companies in similar situations, especially if the geographic relocation is successful for Curaleaf. Other large cannabis companies fighting to survive in particularly challenging markets and have the means to “pack up and go” may use Curaleaf’s relocation model in the future. Cannabis companies currently operate in a challenging and distressed market, given the current state of the economy, so limiting certain challenges by relocating in an effort to maximize margins can mean life or death for some companies.
Other states with caps on cultivation licenses and less prominent illicit markets offer more fruitful opportunities for a company like Curaleaf, which has already built out the necessary infrastructure to but operate but is just looking for the correct location to capitalize. As new states continue to legalize recreational and medicinal cannabis and establish the necessary regulations, the lack of competition would seem enticing to a relocating company, even in a state with unsettled and developing regulations.
One issue with Curaleaf’s approach is the limitation of geographic markets. Since the cannabis industry essentially operates in state silos (at least for the time being), there is a limited number of markets into which a company can exit and enter. For example, domestically in the United States, Curaleaf has already exited three states. With only 21 states (and Washington, D.C.) currently having adult-use cannabis legalized, this only offers Curaleaf 18 more states for business opportunities.
Is this geographic shift by Curaleaf good or bad for the cannabis market as a whole?
At first blush, Curaleaf’s exit from California, Colorado, and Oregon seemed like they were giving up on these states and folding their cards. Additionally, a workforce layoff is always an unfortunate event for those involved. However, these three states need a level set. The cultivation oversupply has driven the wholesale cannabis price so low that farmers have chosen not to grow or renew their cultivation licenses. The oversaturation created an unsustainable environment where cultivators were starving each other out.
If we see other players join Curaleaf in exiting these spaces, the price could increase as demand increases, creating an overall healthier market. California’s reduction in canopy space has already shrunk by about 15% over the past year and some cannabis industry professionals expect this to continue. Those companies with the proper capital runway and ability to survive the short-term down-cycle could be reaping the benefits of the shrinking cultivation footprint in the future.
While whether the Curaleaf exit strategy will be successful and its impacts on the state and national cannabis market will be interesting to watch, what piques my interest is the impact on the local mom-and-pop cannabis cultivators and retailers as a result of a large multistate operator exiting from California, Oregon, and Colorado. For now, we can score this as a win for David versus Goliath, as less competition against a big MSO can only be viewed as a good thing for a small business owner, but time will tell how this will all play out.
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