Based on sales data from individual licensees in Washington State, it appears that consolidation on the supply side of the regulated market is occurring. Although Washington has rules that permit owners to hold an interest in only three production-side entities at most, available information suggests that a small percentage of producer / processor licenses are simply accounting for an outsized portion of the state’s wholesale revenues.
According to figures listed by 502 Data, only 10 of over 1,400 producer / processor and producer licenses posted monthly revenues of over $1 million for November 2018, the most recent month for which information is available at the time of this writing.
For the first 11 months of 2018, the site’s data shows that only about 150 production-side licenses had generated total year-to-date revenue of in excess of $1 million. Another almost 875 showed some revenue for the year, ranging from just under $1 million to only a few dollars. Meanwhile, over 425 more licensees showed no revenue at all for 2018, suggesting that the businesses had gone under or were attempting to ride out tough times by shutting down production for a period.
Despite hundreds of licensees not reporting revenue, Washington’s wholesale market is still oversupplied after two consecutive years of favorable harvest season conditions that have helped drive prices to historic lows.
Retail demand has been leveling off as well after years of strong growth in the wake of the commencement of legal sales in July 2014. According to an analysis from Cowen and Company, total retail revenues for 2018 are expected to grow by less than 10% compared to the year prior, after expanding by about a third from 2016 to 2017.
Based on the figures above, about 10% – 15% of the wholesale businesses reporting revenue constitute most supply side sales taking place in Washington. Meanwhile, a significant portion of the other 85% – 90% of licenses appear as if they are in dire straits, given the small amounts of reported sales last year.
As we have discussed on other occasions regarding Oregon and Washington, market participants have stated to our analysts that even businesses exiting the market can have a negative impact on wholesale flower prices. Operations that are going under in some cases will liquidate remaining inventory at below-market rates in order to meet obligations or generate at least some return.
Larger businesses with higher revenues and significant cash on hand can weather the market conditions created by such scenarios better than smaller producers, who are reportedly struggling to even get their products onto the shelves of retailers. In recent reports we have covered pronouncements from state regulators stating that they intend to introduce measures to make the market more hospitable to small farmers and processors. However, whether any changes will come in time to prevent even more consolidation in Washington remains to be seen.