Cannabis: A Recession-Proof Industry? 

by Stu Waters,

Many people compare the cannabis industry to other “vice” industries like alcohol, tobacco, and gambling. Economic resilience is one of the areas where these industries appear to align most closely – their status as “recession-proof” industries.

Economic recessions have wide-ranging effects on communities. As income and job levels drop, investment declines, and people from every walk of life go into survival mode. They take fewer risks, purchase fewer non-essential goods, and put long-term plans on hold. Many people default on loans and have to struggle to make ends meet.

However, not everyone feels the economic pain equally. Some jobs and industries are able to weather the storm better than others. Historically, several industries have proven themselves capable of surviving – and sometimes flourishing – even during heavy economic downturns:

  • Consumer Packaged Goods. Consumer staples like food, cosmetics, and household products typically retain their value during recessions. Discount items and small, affordable luxuries tend to prosper when large numbers of people decide they can no longer justify their more brazen expenses.
  • Construction and Infrastructure. Construction and infrastructure jobs tend to withstand recessions. When real estate markets dip, governments tend to step in with stimulus projects like the famous Hoover Dam, which provided thousands of workers with jobs in the middle of the Great Depression.
  • Healthcare and Pharmaceuticals. Healthcare is often spared from the impact of economic downturns. In the case of a recession fueled by a public health crisis like today’s Coronavirus pandemic, healthcare and pharmaceutical investment can actually soar upwards, alongside life sciences and biotech.
  • Alcohol and Tobacco. People drink in good times and bad times. Beer and spirits tend to perform particularly well during recessions, while top-shelf wines and champagnes suffer. Similarly, cigarettes and vaping devices outperform cigars by far.

 

Where Cannabis Fits Among Recession-Proof Industries

The cannabis industry is unique in that it fits into three of the categories listed above. Medical marijuana operates within the sphere of the pharmaceutical industry, while recreational cannabis is often seen as a newcomer to the “vice markets” dominated by alcohol and tobacco.

Edibles, topicals, and CBD-containing wellness products have also carved out a niche space among consumer-packaged goods. For many people, these products are among the affordable luxuries people will spend money on while tightening their purses when it comes to major expenditures. The famous “lipstick index” is growing to encompass a wide variety of products that consumers can’t justify as “essential” but that sell well during recessions nonetheless.

Cannabis products can provide the same kind of psychological comfort that snack foods, cosmetics, and leisure entertainment offer to people during a recession. People will often look towards the brands they feel most comfortable with when navigating an uncertain economic landscape. They still want to feel good about themselves, even if they can’t afford a new car, a bigger home, or any of the other major expenses they would otherwise strive for.

The Impact of Recession on the Middle Class

This showcases one of the paradoxical impacts that recessions can have among the middle class – some families end up having more disposable income than they did pre-recession. These are typically prudent, frugal households who have been saving up for major purchases. They have to put their plans on hold, so they start spending more and saving less.

During the 2008 recession, Americans who held onto their jobs still ended up drinking more than they did in the earlier half of the decade. There is reason to believe that successful middle-class households who can weather the effects of a recession without becoming unemployed will turn towards cannabis in the event of an economic downturn.

There are many aspects of the cannabis industry that can meet the needs of these households. In many cases, it requires a conscious marketing pivot towards a new type of customer. Cannabis dispensary owners would be wise to look for signs of these types of households in their communities.

What About Low-income and High-Income Families?

Low-income families may present a challenge for the cannabis industry during a recession. It’s likely that people with low incomes will continue to purchase cannabis products even when faced with unemployment. People who take on challenging, undesirable jobs on nights and weekends or who work multiple jobs and raise families are likely to see cannabis as a reprieve from the anxiety of everyday life.

However, these people are far more vulnerable to black market operators than everyone else. It’s likely that low-income cannabis users will be unable to justify paying more for legal cannabis while illegal, unregulated alternatives remain available. This is a problem that cannabis dispensary owners can’t solve on their own – it requires community support, legislative action, and decisive governance.

High-income families are likely to continue to support the industry, especially in the medical cannabis market. In California during the 2008 Recession, cannabis dispensaries were among the few businesses that were able to attract investment and make rent while the real estate market was crashing down around them.

High-income families looking for stable investment opportunities may turn towards cannabis even if they aren’t users themselves. As the industry gains traction and bipartisan political support, the stigma of owning or investing in cannabis industries will increasingly disappear. Since consumer usage is likely to continue unabated, high-income individuals will find opportunities in cannabis-related tertiary services, like security, research, and software development.

Cannabis Performance is Still Tied to Legislation

Cannabis is likely to resist the detrimental effects of a recession, but it still relies heavily on judicious legislation and political support. A recession may lead lawmakers to consider opening cannabis markets in new territories to shore up tax revenues and enable government spending, or it may entrench political opponents and provoke scapegoating and finger-pointing. Cannabis dispensary owners will need to pay close attention to the economics and politics of their community in order to pave a way forward in the midst of a recession.