Economics

COVID-19 Supply Chain Crunch Impacts Cannabis Industry

Can’t find pre-roll cones? A combination of omicron variant supply chain woes and manufacturing consolidation is hurting suppliers of key cannabis industry components.

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One of the great struggles of today’s legal, publicly traded cannabis industry is to wedge a perishable agricultural product into the shelf-stable, uniformly sized box of a consumer packaged good. This means that the modern cannabis industry is susceptible to the same COVID-19 supply chain crunch plaguing every other commercial sector.

Automobiles are scarce and exorbitantly expensive because of a dearth of computer chips. New home prices have sky-rocketed because lumber and hardware are more costly. And in addition to increased fuel prices and the cost of maintaining fleets of delivery vehicles, cannabis companies are grappling with an increase in prices affecting pre-roll cones and the reservoir tanks for vaporizer-pen cartridges, as well looming shortages of more prosaic sundry items like the plastic lids for flower jars, according to interviews.

But unlike consumers seeking Xboxes or pickup trucks, who have little option beyond paying more for a used good or waiting for a new one to become available, cannabis buyers can choose to patronize the traditional or illicit market. So the cannabis industry’s COVID-19 supply chain crunch comes at one of the worst possible times, as cost-conscious consumers continue to shop on the illicit market because of sticker shock at licensed retail dispensaries.

Not Just COVID, But Holidays and Homogenization

In some cases, items are slow to arrive or more expensive because of the COVID-19 supply chain crunch—but not always.

In China, for example, premier Xi Jinping’s official policy on the virus has been “COVID zero,” which means that for every two weeks at work, port workers quarantine for three weeks to stop the spread of the virus. This policy was upheld even after the more contagious omicron variant’s appearance, according to observers.

But the bottlenecks already affecting the supply chain are poised to become worse over the next month, as workers based in mainland China and other Asian countries where key components are manufactured leave work and travel home for the Lunar New Year, said Alen Nguyen, the CEO of MainStem, a Seattle-based company that runs procurement software used by cannabis companies.

That lost manufacturing time will create a ripple effect of product shortages that will be felt for most of 2022, predicts Nguyen, who identified hand-made pro-roll cones and vaporizer components as the two most affected items.

“We’re seeing a massive bottleneck between those two pieces,” he said. “It’s going to be pretty difficult for the next six to nine months.”

However, when it comes to cannabis and COVID, the main issue appears to be a simple lack of diversity in the supply chain: Too few factories supply too much of the products, which means that if anything goes wrong at any one of these manufacturing centers, ripples are felt all the way down to the consumer.

All The Papers in One Basket

You’ve probably never heard of Mitra Prodin, even if you’ve literally kissed their work dozens of times. Based in Indonesia, on the island of Bali, the company runs what is purported to be the largest pre-rolled cones manufacturing center in the world, with more than 6,000 employees and a staggering 746.7 million cones sold globally in 2021.

For now, most pre-roll cones used by cannabis companies large and small are still handmade overseas in factories like Mitra Prodin. Though he declined to identify the factory by name, according to Nguyen, larger overseas pre-roll factories in countries like Indonesia—where workers are normally packed in shoulder-to-shoulder at work tables—have reduced workforces by up to 50% in an effort to discourage the spread of the omicron variant.

Though not handmade, a similar phenomenon affects vaporizer cartridges. Only a handful of major companies, all based in China, produce the components required for industry-standard vaporizer-cartridge pens, Nguyen said. One, Smoore International, based in Shenzhen, recently filed a trade dispute against U.S. manufacturers for allegedly infringing upon its design patent.

That dispute is ongoing, but the upshot will likely be even fewer sources of components like cartridge tanks for cannabis companies looking to purchase oil tanks to fill, with wholesale prices increasing by as much as 25% as a result, Nguyen said.

Finding alternative sources is difficult during the COVID-19 supply chain crunch, since competing factories simply do not exist. Building one from the ground up is cost-prohibitive, he added.

Consumer Changes When?

In the short term, consumers are unlikely to experience any significant price increases resulting from the omicron labor shortage—in part because companies are very aware that any additional costs will probably be met with consumers migrating to the illicit market, according to executives.

Owing to the fact that most states did not have a legal cannabis market before the mid-2010s, most cannabis companies are new. And they either lack the capacity or the interest to order an advance supply of necessary components, Nguyen said, meaning that any shortage in the supply chain immediately causes a product shortage or a price increase.

But even companies that planned ahead are feeling the impact of the COVID-19 supply chain crunch, with little relief in sight until the supply chain can return to some semblance of normal—which may not happen until the pandemic ends.

Unlike most cannabis companies, CannaCraft, a large manufacturer of edibles, vaporizer cartridges and other products based in Santa Rosa, Calif., stocked up on basic components early in the pandemic, according to Tiffany Devitt, the company’s chief of government and consumer affairs. But like other companies in legal markets like California’s, where businesses say high taxes and regulatory burdens are squeezing thin margins, CannaCraft can’t raise prices in the event of a shortage, she said.

“Our customers are more price sensitive; passing on those charges to them is not an option,” she said, adding that the company has also been affected by rising gas prices and vehicle unavailability.

“As hard as it is to get a car, getting a box truck is even harder,” she said. “Our costs have gone up, but in order to stay competitive, we’ve had to bring our price points down. So, basically, we’re between a rock and a hard place.”

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