Five areas cannabis businesses should focus on during a crisis

Like many businesses, the economic uncertainty spurred by COVID-19 and the resulting broad-based response are quickly creating a new reality for cannabis companies. While many businesses have had to close their doors entirely, access to cannabis has been declared essential in some U.S. states and Canadian provinces. As a result, many cannabis businesses across the entire value chain may need to strike a balance between meeting consumer demands, maintaining the health and safety of their employees, and managing the financial concerns brought on by the ongoing pandemic. 

While all companies have different needs and face unique challenges, here are five areas that cannabis companies can focus on to be proactive during this time:

1. Cash is king

Many companies are facing a number of liquidity challenges, including clients asking to delay payments, suppliers wanting to be paid earlier, general capital markets volatility, and institutions holding back on handing out credit. In the last few weeks, we’ve seen some companies across the value chain taking action to monetize their inventories, which resulted in pressure on prices. In addition, some companies are shortening contracts to gain the flexibility they need to respond to the rapid changes in the market.

To help offset this cash crunch, companies can take numerous steps, including the adoption of a proactive approach to payment terms by stretching timelines for payables while collecting receivables. They can also cut back on non-cash generating activities such as research and development, new infrastructure builds, or marketing. 

Looking longer term, companies may want to stress test how their cash balance looks across various scenarios. What if drastic physical distancing measures and shutdowns go on for two months? Four months? In our view, many companies should be laser-focused on cash flow management, challenging every expense and assuming the worst-case outcome for each situation.

2. Supply chain disruptions

Border closures, manufacturing and logistical disruptions in hard-hit areas, and the slowing of the global economy, among other things, may continue to cause widespread supply chain disruption for a number of industries. Cannabis companies may face shipping delays for items such as packaging products and vape and cartridge hardware from China and the United States. Companies may find it difficult to procure personal protective equipment for employees, such as masks and gloves, given the global shortage of medical supplies. 

To try and get ahead of these issues, cannabis companies can do things like actively analyzing their supply chain, evaluating which products are at risk given their point of origin and considering the logistics surrounding delivery. They can closely monitor usage, build inventory levels for critical items, and implement rationing plans as needed. Companies may also want to identify items that are sourced by a single supplier and develop alternative sourcing plans for each. 

3. Managing human resources

There is little doubt that the COVID-19 crisis is having an impact on cannabis businesses when employees are unable to come into work. Whether it is as a result of illness, self-quarantine, or a need to work from home to care for families, these factors may strain a company's human resources. For some companies, there are select positions, such as the head grower or quality assurance lead, where the absence of one person may disproportionately impact operations. Companies may need to identify back-ups for these roles. Many companies will also need to consider the effects of social distancing measures on operations while prioritizing the health and safety of their employees. 

To help address this issue, companies may provide the necessary supplies to have employees work remotely and enforce strict social distancing measures for those essential employees who must be onsite. Staggered breaks and alternating shifts are other examples of measures that may help minimize contact between employees. Companies can also identify and train backups for each position. 

When it comes to labour, companies may need to balance the focus on cash-generating operations with health and safety. Some companies will need to find ways to operate with less staff and make timely decisions on what business activities should remain operating as the situation evolves. 

4. Shifting customer preferences

Some companies are already seeing a shift away from traditional retail to e-commerce sales and click-and-collect as social distancing measures come into effect. Anxieties around quarantine rules and risk of spread may make contactless purchasing channels more popular. 

As uncertainty continues, we expect that consumers will rely on brands they know and trust. These brands will likely be the ones with which they have already had good experiences. In our view, it’s important that companies continue to focus on providing consistent consumer experiences to safeguard brand loyalty and drive repeat purchases throughout this period.

Providing frictionless e-commerce experiences will likely be critical for many cannabis companies during this time. Customer loyalty can be earned by making certain things easier when everything else seems hard. Companies may also want to communicate the steps they are taking to ensure products are safe, consistent, and in supply. Great brands are typically made by providing consistency and quality over time, and in uncertain times, we see this as even more important.

5. Embrace uncertainty

Like all of us, many companies are looking for answers where there are very few right now. Public health officials are often wary of dictating timelines as the situation evolves rapidly. Companies looking for comparisons on how to manage this crisis are unlikely to find precedents. With no foreseeable end date, companies may need to find ways to cope with the situation’s magnitude, uncertainty, and speed as it relates to their particular businesses.

In order to respond to this near constant uncertainty, companies may want to consider implementing an incident management team whose role is to understand, analyze, and respond to the evolving situation. Specifically, the incident management team can do things like: 

• Monitor how the situation is evolving on a daily basis; 

• Assess how it might impact business and develop scenario plans;

• Implement swift changes to the business model, including the monetization of inventory or ceasing of non-cash generating operations; and

• Communicate transparently with employees and stakeholders. Employee communications may emphasize the prioritization of health and safety in the workplace, the state of the business, and the possible impact it may have on their jobs.

The financial and operational stress brought on by this pandemic present many cannabis companies with unique challenges compared to those the industry faced throughout 2019. And while many cannabis companies will face significant uncertainties in the coming weeks and months, we believe there is a silver lining for the sector. Early data from this crisis suggests that cannabis, with its relative affordability and varied use cases and consumption occasions, may be counter-cyclical - it may sell well in both good times and bad times. We believe that this data, even if an all-too-early indication, speaks well for the industry’s fundamentals as we collectively navigate these uncertain times.

This is not an offer to sell or a recommendation to trade in any securities. This information is provided as of the date hereof. This document contains data obtained from third parties that Canopy Rivers has not independently verified. This document also contains forward-looking information within the meaning of Canadian securities law, which is based on certain assumptions. While management believes these assumptions are reasonable based on information available as of the current date, they may prove to be incorrect. Many assumptions are based on factors outside of Canopy Rivers’ control and actual results may differ materially from current expectations. Forward-looking information involves risks, including, but not limited to, the risk factors set out in Canopy Rivers’ most recent Management’s Discussion and Analysis and Annual Information Form. You should not place undue reliance on forward-looking information. Except as required by applicable law, Canopy Rivers assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances.