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What inflation? Cannabis actually costs less these days

By Alicia Wallace, CNN Business

Updated: Sat, 26 Feb 2022 10:30:06 GMT

Source: CNN Business

The grocery run, the fuel-up and the utility bill are all costing more these days — not to mention the surging home prices and rising rents. But a trip to the neighborhood dispensary might not elicit similar feelings of sticker shock.

While Americans have seen prices climb across most of their regular expenses, the cost of cannabis doesn't appear to be increasing at a similar clip -- and in some instances, a bag of edibles or an eighth of an ounce of flower might even be cheaper today than this time last year.

Prices of marijuana flower, edibles and vape products, when averaged by the price per milligram or gram of THC, declined by 16.7%, 11.8% and 12.4%, respectively, from January 2021 to January 2022, according to cannabis analytics firm Headset, which tracked sales in California, Colorado, Michigan, Nevada, Oregon and Washington.

"This would indicate that inflation has not yet affected the prices consumers are paying for recreational cannabis in the United States," Cooper Ashley, Headset's senior data analyst, told CNN Business via email.

Absorbing rising costs

While any cost savings are welcome news to consumers who are feeling price pressures elsewhere, the product trends don't tell the full story, analysts say. Price declines may not mean cannabis is immune to inflationary effects, they're just yet another example of the complex business dynamics playing out in this burgeoning industry.

"Inflation is obvious when all else is equal," said Andrew Livingston, director of economics and research at Vicente Sederberg LLP, a cannabis law firm based in Denver.

In cannabis, there's little homogeneity -- especially when it comes to pricing. Marijuana remains federally illegal, which effectively eliminates interstate commerce. This means that states that have legalized the drug have set their own regulations, resulting in different market sizes and unique industry dynamics.

As a result, prices become heavily dependent upon aspects such as state-level supply and demand, Livingston said.

That can include heavy competition within the regulated market; high taxation rates; the undercutting of prices by illicit or unregulated operators, including street dealers; and the natural growing pains that come with running a business in uncharted territory, he said.

If the prices don't climb, "it doesn't mean that there's no inflation," he said. "It means there are other factors at work that would overwhelm the inflationary signals."

The cannabis industry has not been spared from the supply chain disruptions and labor market challenges spurred by the pandemic, said Bethany Gomez, managing director of the Chicago-based Brightfield Group, a cannabis market research firm. Parts for vape pens are among the many products adrift on waylaid cargo ships, and the industry has faced rising labor costs and increasing ingredient prices, among other factors, she said.

For the most part, those higher costs are eating away at the margins, rather than driving up prices on the store shelves, she said.

"A lot of that is getting swallowed and not necessarily [passed] along to consumers," she said, echoing the challenges such as taxation and competition highlighted by Livingston.

Scaling back and ordering smarter

Instead, the effects of the higher costs are being seen in other ways, such as reining in expansion plans and trimming product ranges.

"You're going to have to be a lot more ruthless about products that you keep and you manufacture and you're promoting," Gomez said.

Native Roots, a cannabis retailer with 20 stores in Colorado and three in Canada, said it has navigated inflation by negotiating prices for larger orders and "ordering smarter," according to Theresa Ekman, the company's supply chain director.

"During the pandemic, we did cut back to make sure we were ordering the right product that our consumers are using," she said. "So we don't have as much from a variety standpoint, but that's been a benefit to the company as a whole."

The biggest cost increases have come from labor, where Native Roots increased its wages by 14% on average to keep pace with competitors and retain employees, she said.

But the consumer isn't seeing the effects of those and other costs, Ekman added.

"There's been so many other unfortunate, negative influences with regards to this pandemic that we really did not want to be one of those," she said. "We wanted to be able to continue to... maintain the same prices to keep our customers happy."

At Gorilla Rx, the first Black woman-owned dispensary in Los Angeles, Kika Keith has taken a similar approach.

In order to stay competitive, she can't simply raise prices and, as a small-business owner, she doesn't have the cash reserves and purchasing power to offset some of her increased costs.

"Even as an equity business owner that made an effort to have my store in my community in South Central Los Angeles, where you're looking at how inflation affects the disproportionately impacted communities and the disenfranchised, I can't even say to my customers, 'Inflation and the supply chain is causing me to have higher prices, so work with me,'" she said, adding that she sees a similar theme playing out among the Black-owned and social equity brands she carries in her store.

"I see how they can't even budge on their prices," she said. "So they can't compete with the larger brands on my shelf."

And the loss of sales ultimately negatively affects the local community, she said.

"That's affecting our families," she added.

Keith and other operators have become creative. They partnered on an effort called The Black Box Project, which includes a variety of products from Black-owned brands in a box for a discounted price. Each of the four participating dispensaries had 50 boxes available.

Gorilla Rx sold out on the first day, Keith said, adding that she believes the effort could serve as a model for the future.

"It's really putting us in a position to work cooperatively and really look at cooperative economics and look at how we can seize our buying power in working together; how can we seize our marketing power and work together," she said. "I think that's the beauty that's coming up -- the rose that's coming from the concrete."


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