As coronavirus takes the world by storm, no nation — or industry — is completely insulated. And the same goes for cannabis.
Vape, equipment, and specialty packaging manufacturers that do business in China have been hit by demand-based price hikes on raw materials and delays due to factory closures, worker shortages, and transportation restrictions. These new hardships only compound difficulties for the cannabis sector, which has struggled throughout the past few months. The added burden could be disastrous for companies already struggling, although some are better positioned to weather the storm.
"First it was the tariffs in China, followed by the general cannabis collapse, which started with the Canadian companies and trickled into the U.S. And then followed up by the vape crisis that happened last September, and now we've got the coronavirus. So it's literally one thing after the other," said Nick Kovacevich, CEO and founder of KushCo Holdings, which, as a vape accessories and packaging company, is especially vulnerable to the impacts.
Shares of KushCo, which trade over the counter in the U.S., and other cannabis accessories companies like Greenlane ($GNLN) have tumbled roughly 32 percent and 31 percent, respectively, in the past two weeks on top of an already challenging year that has seen stocks for some of the biggest players fall as much as 50 to 80 percent.
Although reports suggest conditions are improving in China, the outbreak of respiratory illness COVID-19, ground the economy to a halt earlier this year. Strict quarantine orders, implemented to stem the global creep of infection, prevented many of the 300 million workers from rural areas from getting to factory jobs. That has created major issues for the world's leading manufacturer and put serious kinks in global supply chains, along with the seasonal delay caused annually by the Lunar New Year holiday, Kovacevich said.
"We can expect somewhere between six to eight weeks delay between the Chinese New Year and coronavirus. It's not terrible, but it's meaningful — that extra three to four weeks no one was planning for," he added.
Kovacevich said KushCo by-and-large has been all right. That's because the company, experienced with doing business in China, stocked up in advance of the holiday. That doesn't mean they are fully stocked — Kovacevich said specialty and customized products tend to run out fastest, but that the company has generic alternatives for its customers.
"We are out of a few items, but the good news is, we have solutions," Kovacevich said. "Maybe you're not going to get your customized, blue vape pen with the wood tip, but we do have vape pens. Right now, people are like, 'Oh I'd rather be in the market than out of the market, so I'll just take what you have.'"
In extreme situations like this, it helps to have connections in China, like Ontario-based hardware company Feather and New York-based vape manufacturer The Blinc Group. While Feather, which designs and supplies vape hardware to partners like Organigram, is only four years old, the company's Director of Product Development Mitch Thompson has done business in China for the last 15 years. That experience drove Feather, much like KushCo, to plan ahead for delays normally associated with Lunar New Year.
"Because it hit around Chinese New Year, it was almost like chaos, like a perfect storm of a horrible situation. So we expected the worst right off the get-go," Thompson said. "We convinced Organigram to put in a large order before Chinese New Year, because we told them it would be a big issue if they tried to put in a large order immediately after."
Because Feather planned ahead, Thompson said the company has been "coasting pretty well," but is gearing up to place another order and could see delays then. In particular, he is concerned about batteries, which seem to be experiencing the most serious production delays.
The Blinc Group CEO and co-founder Arnaud Dumas de Rauly said it helps that his company oversees its entire supply chain in China and has built-in redundancies. That means the vape company, which develops products for clients like Hanu, has numerous suppliers — some big, some small — for raw materials, multiple manufacturing partners in case one or more are out, and a number of relationships with shipping and logistics providers.
"It all comes down to being used to doing business in China, and having 10 years of experience doing that really, really helps in understanding, as well, the Chinese culture, and how everything works over there," Dumas de Rauly said.
For lesser prepared companies, delays can lead to missed production and shipping deadlines, empty shelves, ruined relationships, and, ultimately, blown sales and revenue forecasts. Some companies, like Canadian cannabis producer Tilray, have already begun preparing investors for the impact of coronavirus at a time when higher-margin products like vapes are intended to breathe life back into the Great White North's cannabis sector.
"That's one of the areas where there is some impact. It's really on the branded hardware," Tilray CEO Brendan Kennedy said on a call with analysts following the company's recent earnings report. "One of the things we did that turned out to be smart, but maybe not intentional, was we ordered significant inventory of the vape hardware that was unbranded so we could put whatever brands that were doing well — we could put that branding on the hardware ... That gives us a little bit of a pressure relief valve as we are waiting for additional hardware to come to us from various international sources."
Although coronavirus has disrupted global supply chains, distress abroad has spelled opportunity for some domestic cannabis suppliers.
U.S.-based Grove Bags, which creates customizable containers that aim to preserve the quality and potency of cannabis, produces about 60 percent of its product portfolio in its own Mansfield, Ohio factory. Although the additional 40 percent of its product offerings (including pre-roll cones, labels, and glass and plastic jars) come from China, CEO and co-founder Jack Grover said that the company has seen a 40 to 45 percent bump in business since the Lunar New Year as cannabis, food, and cosmetics companies scramble to source packaging domestically.
"If you can't get packaging from East Asia and you can't get packaging from Italy — both of which are enormous packaging countries — and you can't really get packaging in from Taiwan right now, and you are looking at enormous factory closures and economic shutdowns in more and more countries, a lot of stuff has gone back to domestic sourcing," said Grover.
As a domestic manufacturer, Grove Bags has so far been lucky to be shielded from the brunt of delays in China. Grover worried, however, that delays felt by the company's partners, like Dow Chemicals from which it sources industrial chemicals, might soon translate to its own bottom line.
"You can't find one American or German or Canadian chemical company that doesn't have enormous investments and reliance on infrastructure in China," Grover said.
Concerned over the long-term economic impact of the virus, Beijing has urged local officials to get their factories back up and running, as they balance meeting growth targets with limiting viral spread, NPR reported. Factories have slowly begun to reopen and workers are returning to work, but it will likely still take time to get back to 100 percent. After that, there may well be other delays, like shipping bottlenecks to overcome, but many in the industry are convinced the worst has likely passed. For healthy companies, coronavirus may only cause a temporary hit, but for others on shakier ground, the challenges posed by the outbreak may further stretch their already tenuous financial standings.
"With the struggles that cannabis has had … from the already dried out and exacerbated funding environment and the intensely competitive environment cannabis companies already have, now this on top, it's going to be a big strain," Grover said. "I think this crisis — and the challenges that come along with it — certainly has the ability to become the straw that breaks a lot of camel's backs here. It is very poor timing and a very serious threat."
