Is Cannabis Recession-Proof? COVID-19 Puts The Theory To The Test

In an uncertain world, cannabis has posted strong sales. But that doesn't mean its financial future is a sure thing.

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Cannabis is having a moment. Amid stay-at-home orders during the COVID-19 pandemic, cannabis dispensaries have been deemed essential services in most states where the plant is legal. Original orders closing dispensaries were quickly reversed following public outcry. Constituents clearly demonstrated their high demand for cannabis at a time when people are experiencing or expecting decreased income. Sales have been at a record high. 

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All this begs the question: Is cannabis recession-proof?

Related: Will The Coronavirus Crisis Help Legalization Efforts In The Future?

More like recession-resistant

The better term may be recession-resistant—at least to a point. Cannabis businesses are able to stay open and afloat as long as regulators don’t shut their doors by deeming them non-essential. Massachusetts, for example, closed down all recreational cannabis operations, classifying only medical cannabis businesses as essential. It would be practically impossible to be recession-resistant if the stores are unable to be open and generate the revenue they need to afford various fixed costs, such as rent.

The good news is that, for now, consumer demand for cannabis is still strong. Cannabis is a great companion product for those in quarantine who use it while cooking, watching movies, reading, and so on. Especially during this stressful time, certain cannabis products can also be extremely beneficial for relieving anxiety. In fact, what makes cannabis unique compared to other recession-proof products, like alcohol or cigarettes, is its wellness component. While there is a sense of escapism that comes from consuming THC, other cannabinoids, such as CBD or CBG, are known for enhancing mood and health. 

The future is hard to predict

Unfortunately, even though the economy is being hamstrung by lockdowns, we likely have not hit the bottom yet. Unemployment claims in the U.S. have been piling up at astonishing rates with over 22 million people filing for unemployment in only four weeks. In comparison, it took 18 months to reach that number during the Great Recession between 2007 and 2009. Economists at the federal government’s St. Louis district project predict 47 million more people will lose their jobs based on a recent analysis of how much worse the situation could become. This will reach levels only comparable to the Great Depression. 

Considering these numbers, we are looking at a more severe recession than in 2009. To make matters worse, it will take longer to see these jobs return due to the global changes occurring as a result of the pandemic. And that’s the point. Cannabis and alcohol may be recession-resistant, but there are not many products on the market that are resistant to a Depression.

Related: Why This Venture Capitalist Only Invests In Bad Industries

The hope is that we will not get to that point, and the good news is that countries like Italy and Denmark are backing off restrictions that should start to bolster the economy. Of course, in the months following the lockdown, our psyches are likely to be altered and although businesses may reopen, many of us may opt to stay in our homes or outdoors in open spaces. The speed of our nation’s recovery will be partially determined by how regulators open our economy. For example, restaurants that reopen may choose to or be forced to place a cap on the number of people allowed inside at once. It could very well take years until we return to a sense of normalcy, and therefore the full strength of the economy. Also, if we should see a spike of cases again on reopening, this could require administering restrictions or even lockdowns again. 

The case for cannabis

Supporting the cannabis industry now is the best way to ensure that this new sector of the economy thrives in a post-COVID world. There are many areas in which the cannabis industry contributes to the economy, and this pandemic is highlighting its value to society.

The industry has created hundreds of thousands of jobs, with legal cannabis now supporting 243,700 full-time American employees as of January 2020. It is the fastest-growing industry in America with 33,700 new jobs created nationwide in only 12 months. By promoting the cannabis industry, an essential industry, we’re saving jobs. Also, the complicated regulatory nature of the cannabis supply chain makes it such that these jobs cannot be simply shifted overseas to reduce costs. 

It also creates tax revenue for the states in which it’s legal. California’s cannabis industry brought in close to $74.2M in tax revenue in the second quarter of 2018 alone, a 22 percent increase from the first three months of the year. Since 2014, Colorado has raised roughly $1.02B from taxes, licenses, and fees. Those numbers should give other states the incentive to get the work on legalization bills done. New York estimates have shown legal cannabis would bring in over $1billion in revenue annually. This is capital that states desperately need, given the financial crunch they’re experiencing amid COVID. 

With these staggering benefits, we cannot let the industry lose ground. Destabilizing the market would cause it to slip back underground where it is unregulated and unsafe, putting millions of consumers at risk—and resulting in millions of dollars lost in state revenue to the illicit market. The cannabis industry is only at its beginning stages and has a lot more to provide to the general health of the U.S. economy.

Time will tell

While some market speculators would like us to believe that cannabis is recession-proof, the COVID-19 crisis is truly putting that statement to the test. It is difficult to predict the full economic impact our nation will experience in the coming months, and it is highly dependent on how lawmakers manage the reopening of our economy and the pace that we all return to work. What is known is that cannabis has become a multi-billion dollar industry that supports the well-being of consumers and positively contributes to local markets. No matter what economic twists and turns we’re likely to experience, that’s something worth preserving.

Related: 7 Reasons Legal Cannabis Is a Recession-Proof Industry

Emily Paxhia

Written By

Emily Paxhia is a co-founder and Managing Partner of Poseidon. Emily has reviewed thousands of companies in the cannabis industry and has worked with countless founders in many capacities. Emily has held board seats for multiple portfolio companies and participates as an adviser to multiple teams.