The cannabis industry in North America is facing an ‘epidemic’ of recent job layoffs and a plummet in the price of pot stocks.
This week, California-based Flow Kana was forced to cut 20% of its workforce, although CEO Mikey Steinmetz has pointed the finger of blame towards the state.
“It was one of the toughest decisions that I’ve ever had to make,” he said. “It almost feels like an epidemic of companies of similar size going through similar processes.”
This statement comes after similar companies such as Ease and Weedmaps were also reportedly laying off staff members.
Alongside the CEO of Eaze stepping down, the cannabis delivery giant announced that 36 members of the workforce were let go, which represents around 20% of their overall workforce.
Cannabis advertising giant Weedmaps also announced via the CEO Chris Beals on Twitter that they had resorted to laying off more than 100 people from various departments, amounting to around 25% of their total workforce, due to the slow development of the recreational cannabis market in California.
There are a number of theories as to why the cannabis industry is currently in the midst of a transitory phase. Some have suggested that it is the first signs of the hype bubble popping, while others have claimed that the ongoing issue of difficult banking arrangements has halted innovation.
Despite cannabis being legal in California, the plant is still illegal on a federal level, which means federal owned and insured banks are hesitant to allow cannabis companies to utilise their services.
The banking issue was seemingly making headway due to a Californian bill which would allow both banks and credit unions to begin business with weed companies on a limited basis. But this was then stopped in its tracks after the sponsor, Senator Bob Hertzberg announced he was pulling out of the agreement due to changes in the bill, deciding it would be postponed until early 2020.
Fear of chastisement
Sen Hertzberg reinforced that “if we’re going to do this, we have to do it right”, when reassuring that Senate Bill 51 would be committed to, which would give financial unions unique licences to accept deposits from cannabis companies and allow them to open accounts, without fear of chastisement from the federal system.
Allowing weed companies to utilise traditional banking services would also permit firms to easily obtain a business loan should they need one, thus avoiding having to resort to cutting jobs and laying off a hefty chunk of their capable workforce.
But Steinmetz has criticised the state for not allowing enough retail cannabis stores, with just one store per 34,256 of adults currently in operation.
75% of Californian cities and counties still forbid cannabis retail sales despite Proposition 64, which legalised the recreational use of cannabis being put through more than three years ago.
“We need more retail, and it’s not in a few months. We need retail immediately,” Steinmetz said
The failure to issue licenses quickly enough in order to create a more stable and high-functioning market for legal recreational cannabis has also been criticised, as California lags behind most other states that have the same legalised cannabis status.
The lengthy and bothersome path to opening a state-authorised legal cannabis store also means that potential shop-owners continue to operate via the black market, selling unregulated cannabis to would-be customers who would all contribute to paying taxes, which is ultimately beneficial for the state.
The large tax burden faced by legal growers, which can be as high as 90%, pushes those who don’t operate as a conglomerate company back into the shady cannabis underworld, an issue that the state could simply rectify by amending the fixed rates of $9.25 per ounce of grown flower, to percentage based.
Forced into layoffs
It seems as though Flow Kana, Eaze and Weedmaps’ decision to lay off more than 20% of their workforce is just the tip of the iceberg, as two more California-based companies, CannaCraft and Grupo Flor, have both recently been forced into downsizing due to cash flow concerns.
More than 600 job layoffs were reported throughout the industry in October, marking an early warning sign for the cannabis industry which still remains steeped in its infancy.
Both companies blamed the recent job cuts on financial challenges due to “slower-than-anticipated growth” of the legal market in California along with investment deals that fell through making business expansion and necessary cash for future projects a dream of the past.
Grupo Flor’s CEO Gavin Kogan emphasised that the company layoffs were painful and that “it’s not the end of the world. It’s just a difficult time in the industry for everybody”, pointing to the fact that multiple cannabis businesses in the area have had to undertake similar steps.
The ‘epidemic’ has understandably concerned hopeful investors and traders, with cannabis stocks sliding dramatically over the past week.
Canadian cannabis giant Hexo’s stock is now below the $2 mark – down a jaw-dropping 77% from its peak in April, while it is also down 55% since the first week of October.
According to Business Insider, the average deal size from venture capitalists has also fallen dramatically since the turn of the year.
The decline of businesses making a large profit and ultimately letting workers go began more than a year ago, but it was not initially noticeable as it was mainly a problem for smaller companies. However, since larger corporations have been hit by the same issues, industry observers have picked up on the rocky road several businesses are traversing.
The cannabis industry is no longer the gold mine it used to be and it is becoming less attractive to investors as the tribulations it’s facing become more apparent.
Whether the blame falls to the lack of banking options, lack of retail spaces, poor managerial decisions, lack of profits, or a mixture of all these issues; the reality of the situation is that more job cuts are to be expected, while the cannabis industry faces the same problems all types of mainstream businesses also experience, particularly during the initial beginning phase of their existence.