The Oregon cannabis market is headed for an epic shakeout, with retail and cultivation likely to be the first, and most painful, verticals to fail, according to one industry insider. Casey Houlihan, Executive Director of the Oregon Retailers of Cannabis Association, expects that within the next 18 months, the Oregon market will shrink due to massive oversupply and the glut of retailers in the state. When asked how the Oregon marketplace was faring, Houlihan said “the next year or year and a half will be bloody.”
Part of the state’s rationale for legalization was to eradicate the illicit market, but few states have been able to do so fully even as legal markets expand rapidly. There are retail product quality issues that appear to have emerged out of price declines as growers, manufacturers, and retailers look to less expensive products to compete with illicit market prices. Houlihan has witnessed the effects of the cessation of COVID-related federal relief and stimulus programs, as well as inflation, in retail businesses. He sees consumers pulling back – buying less expensive products and buying less often with inflation eating up disposable income.
Houlihan expects the reordering of the market will begin at the retail level, but noted, “when retailers sneeze, growers catch a cold,” meaning distress in one part of the market is easily spread through the supply chain. He thinks growers too will capitulate over the next 18 months and few new cannabis licenses will be issued with the moratorium in place. In fact, the only new licensing opportunities are for social equity entrants, such that an existing license that is surrendered will be issued to such applicants, but no new licenses will be issued.
Regarding demand, Houlihan is seeing “a rebound away from extracts” and stated flower purchases comprise “50% or more of the retail market.” The least expensive retail prices he has seen have been $30 an ounce for outdoor flower and $50 an ounce for indoor product. He has seen “mid or upper tier quality” smokable flower at $80 to $100 per ounce but noted flower “is still less expensive from a friend,” even with top shelf ounces going for $70 in some licensed stores. Despite extremely low prices, the reality is the legal market is still more expensive than the illicit market.
Some Oregon growers have responded to ever-lower prices by growing more product to sustain previous levels of income. As well, some of what is grown legally can end up in the illicit market as growers fight to survive, with some product reported as failing required testing instead finding its way “out the back door.” Ultimately, though, these self-defeating strategies will wear out and growers relying on them to stay afloat will have to either sell their businesses or close shop in a deficit situation.
There are signs that the market is beginning to seek balance. Houlihan said some growers have scaled back their operations, having learned that with cannabis prices low, and apparently headed lower, there is little point in expanding cultivation capacity.
Houlihan referred to the next 18 months as the “consequences phase,” a naturally occurring cancel / replace economic function in a massively oversupplied market. He noted that some social equity businesses feel they have been set up for failure, entering a market where the biggest players can go for months without earnings to drive smaller outfits out of business by undercutting price.
At the end of the day, Houlihan anticipates a natural attrition across the supply chain, beginning with retail and extending to cultivation. Newer, larger players – who can sustain losses to a greater extent and figure out how to make money in a heavily discounted environment – are likely to dominate the market in the coming years. The illicit market has not gone away and in fact is thriving on “back door deals” as some of Oregon’s first generation of legal cannabis entrepreneurs look set to be replaced in the “consequences phase” of the market.