What is the economic outlook for marijuana companies in 2025?

(This column first appeared in the November-December issue of MJBizMagazine. To be considered as an MJBizDaily guest columnist, please submit your request here.)

The macroeconomic environment has a huge impact on cannabis investment opportunities.

While recent years have been rough for the industry, the future looks somewhat less turbulent as macroeconomic pressures on cannabis businesses alleviate.

A few years out from COVID-19, the industry is exiting a period of abnormally high sales driven by pandemic purchasing.

Demand is more predictable, and consumers are returning to pre-pandemic behaviors.

Still, some critical business operations will continue to be influenced by macroeconomics – and how companies respond to these factors will ultimately decide the health of their cannabis businesses.

Cost of inputs

Many companies have experienced higher costs for inputs such as labor and packaging, which has required them to become more efficient.

This resulted in innovations such as curbside sales and delivery services, developments that prompted an increase in revenue per employee.

In addition, the industry pattern of delinquent payments forced many businesses to essentially operate on forecasts of 10-month cash flow rather than 12-month cash flow, which led cannabis operators to wring out as many costs as possible.

Supply chains have normalized for the most part, and risks have shifted more to the geopolitical side than the supply-chain side.

Creating efficiencies

Another factor that compels the need for greater efficiency is price compression.

As more states choose to regulate marijuana programs, prices will normalize and converge.

Operators must be prepared for this and maintain fiscal discipline.

There was a lot to learn from those who did “more with less,” and this practice will ultimately define the winners and losers in this space.

Cost of capital

With the rise in interest rates in recent years, the cost of capital increased significantly for cannabis operators.

Those who could get investment capital paid extraordinarily high interest rates in many cases running in excess of 30% for smaller operators.

As a result, new cannabis markets that sought to give small businesses an edge were impacted by the higher cost of capital, which suppressed growth in emerging markets.

Store and business openings also were delayed.

And with fewer stores opening, fewer consumers participated in regulated markets, meaning less revenue was generated for businesses and for states.

Now, interest rates are forecast to decline in both 2024 and 2025, although by how much is unknown.

Regardless of the amount, this will have a positive effect on both operators (lower costs of capital) and consumers (lower interest rates on credit cards).

The lower cost of capital is huge, given how margins are tight and cash flow is so critical.

For perspective, a 1% decline on a $2 million loan will result in a $20,000 reduction in interest rate payments each year.

The greater the reduction in interest rates, the better off operators will be.

Outsourcing operations

Larger businesses also felt the higher capital costs.

Vertically integrated marijuana businesses, saddled by heavy debt, divested from this model in favor of low-touch outsourcing models.

Multistate operators and big brands started to leverage smaller businesses in mature and emerging markets to supply retailers – similar to what large, licensed producers did
in Canada.

Brands were able to introduce products in multiple states without the typical associated build-out costs.

By deploying a revenue-sharing, low-touch model, MSOs were able to maintain or expand their market presence at a significantly lower cost.

This model is the future of cannabis.

Cannabis tax reforms

Federal and state tax policies have changed little over the course of the marijuana industry’s young life.

For example, the burden of Section 280E of the Internal Revenue Code remains in effect, costing cannabis companies more than $2.2 billion in extra taxes when compared to what taxes would be paid if they were treated as mainstream businesses.

If federal rescheduling of marijuana happens and 280E is eliminated for both medical and recreational businesses as a result, it would improve the overall cash flow of the industry by $3.1 billion in 2026.

Another tax reform on the table is the expiration of the Tax Cuts and Jobs Act of 2017.

If the temporary tax cuts expire in 2025, cannabis operators face a potential tax increase as pass-through income, and small-business deductions will ensue.

Additional proposals could increase corporate taxes from 21% to 28%.

Each of these scenarios could have a significant impact on cannabis operators.

With all of this going on, it will be important for industry stakeholders to demand regulators reduce taxes and fees.

Some markets, such as Massachusetts and New York, have eliminated 280E from their state taxes.

Cannabis industry outlook

Several developments are increasing optimism in the industry.

In a recent business-conditions survey, only 27.3% of cannabis operators nationwide reported they were profitable.

While this might sound low, it is actually an improvement from 2023 (14.4%).

And while the lack of cash flow and profitability might seem daunting, the level of optimism both in the near term (one year) and medium to long term (three to five years) was surprisingly very high.

Despite the many obstacles faced by the cannabis industry, those that remain in the market have shown resilience and nimbleness – characteristics they must continue to exhibit in the years to come.

Beau Whitney is the founder of Oregon-based cannabis data and research company Whitney Economics. He can be reached at beau@whitneyeconomics.com.