Supply Chain Crisis Hurting Cannabis Industry

In addition to being the most severe worldwide health emergency, COVID-19 has created many other social and economic problems. During the lockdown, consumers’ purchasing fewer cars led to computer chip manufacturers shifting their focus to computers and mobile devices. Rising lumber costs have caused housing prices to skyrocket. Increased demand for goods (i.e., Amazon Prime, et al.) has created a bottleneck of dozens of container ships backed up off of Los Angeles and Long Beach ports, unable to offload products. 

During the pandemic lockdown, marijuana delivery services thrived, the cannabis industry suffered the fewest employee resignations, and workers learned to relax more in their work-from-home environments. But the supply chain crisis is leaving no industry unscathed. Fuel increases, vehicle scarcity, and increased production costs have tightened profit margins.

The cannabis industry is still very new – most states have not had a legal cannabis market before the mid-2010s – and most cannabis companies either lack the capacity, financial ability, or the interest to stock up on a supply of necessary components. Any slowdown in the supply chain causes shortages or price increases. Even for companies that planned, the COVID-19 supply chain crunch has affected their ability to provide enough products on time. Many cannabis companies struggle with price increases in pre-roll cones, reservoir tanks for vape tubes, and looming shortages of more every day sundry items like the airtight jars.

Customers wanting a new car or PS5 have little choice other than to pay more. But cannabis patrons can turn to the illicit market. The still-growing industry finds itself in an exceedingly precarious position.

Based in Santa Rosa, CA, CannaCraft is a large manufacturer of vaporizer cartridges, edibles, concentrates, and other recreational and medical cannabis products. Early in the pandemic lockdown, CannaCraft could stock up on essential components. But like other cannabis companies in legal markets like California, CannaCraft claims high taxes and regulatory burdens are tightening already thin profit margins. Tiffany Devitt, the CaanaCraft’s chief of government and consumer affairs, says they can’t raise prices in the event of a shortage.

“Our customers are more price-sensitive; passing on those charges to them is not an option,” said Devitt. “Our costs have gone up, but in order to stay competitive, we’ve had to bring our price points down.”

Policies in other countries can exacerbate the supply chain challenges. To slow the spread of the virus, China’s Xi Jinping has instituted an official “COVID zero” policy. Port workers must quarantine for three weeks for every two weeks at work. Industry analysts predict the supply chain woes could soon worsen as workers in Asia, where key components are manufactured, leave work to travel home for the Lunar New Year. 

Alen Nguyen, the CEO of Seattle-based MainStem, a company that runs procurement software used by cannabis companies, predicts this lost manufacturing time will cause a ripple effect of product shortages that will be felt for most of 2022. For the marijuana industry, handmade pre-roll cones and vaporizer components would be the hardest hit products.

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

For the cannabis industry, the biggest hurdle is a lack of diversity in the supply chain. Too few factories are responsible for too much of the product supply. Any slowdowns at just one of these manufacturing centers send a catastrophic ripple effect to the consumer.

Indonesia-based Mitra Prodin is one of, if not the, largest manufacturing centers of pre-rolled cones in the world – more than 6,000 employees and 746.7 million cones sold globally in 2021.

Most pre-roll cones used by cannabis companies are handmade in factories like Mitra Prodin. Typically, workers are packed in shoulder-to-shoulder at work tables in larger overseas pre-roll factories. Mitra Prodin has taken precautions against the spread of the COVID-19 omicron variant by spacing out its workers, which has diminished workforces by up to 50%.

Finding alternative manufacturing sources is daunting during the COVID-19 supply chain crisis. Competing factories do not exist, and building one from the ground up is cost-prohibitive.

Companies are painfully aware of the option for customers to move to the illicit market. And, smaller profits are better than zero profits, so consumers are unlikely to see significant price increases resulting from the omicron labor shortage for the immediate future.