No one thought it was possible when cannabis was first legalized, but there is a growing problem in the cannabis industry: expired inventory.
Cannabis is, ultimately, a green and leafy plant. It conforms to all the rules of plant life, including the fact that it can go bad. Once you remove a cannabis bud from the stalk, it dies just like any picked flower. It begins to dry out, wither, and eventually rot if not cured correctly. Even processed cannabis products go bad over time, just more slowly. Cured bud becomes too dry and crumbles into dust. Refined concentrates slowly break down chemically until the quality is degraded.
The Growth of Expired Cannabis
Unfortunately, some states have been a little too effective at creating an inventory before demand has a chance to catch up. Even Canopy Growth, the world’s largest cannabis company, is shutting down over half it’s greenhouses. Partly to grow outdoors, now that this is legal, but also because they are producing more buds than anyone knows what to do with. And the excess is expiring in storage.
This is a problem for dozens of cannabis grow-ops across the country. When demand doesn’t meet the cannabis plant’s incredible ability to produce, you wind up with expired extra. now let’s talk about what that expired cannabis inventory is really costing you, and why to trim your production to meet local demand.
- Climate Control
The first cost of expired inventory needs to be assessed right at the beginning: the resources you use to grow. How much do you spend on lights, climate control, nutrients, soil, and of course the green house space itself? That all adds up. Together, your growth costs can be calculated as a lump sum. Now divide that sum by the total number of ounces of bud you harvested. That’s your cost per ounce of cannabis to grow.
Now multiply your growing cost-per-ounce by the number of ounces that were expired and had to be thrown out. That’s the amount in grow-costs (or the Grow-ROI loss) incurred by expired inventory.
Product Processing Costs
If you process your own bud, as many grow-ops do, then expired finished products that go unsold also cost you every step along the way. Just like your greenhouse growing costs for unsold cannabis, you’ll be losing a similar percentage of the investment you put into processing the cannabis products.
Whether you are curing bud to last longer in a jar or you’re refining concentrates into butters and shatters, the resources you use to produce expired products are part of that expiration cost.
Every cured batch of cannabis uses up a few key supplies. Chemicals used to cure the leaf or concentrate the dab must be restocked, even if you don’t sell what they were used to produce. Dishes and implements, disposable gloves and safety gear, and the supplies used to clean up afterward are all part of the cost.
Don’t forget the value of your employee work hours as well. From the growers who tended and harvested to your teams working carefully to cure and concentrate, no doubt a few hours went into every product that goes unsold. Pay those wages without direct ROI from revenue.
Wasted Packaging Materials
For brands that package their own products, as many do, packaging costs should also be considered. There are many precise regulations on how cannabis products must be packaged and labeled. Seal, child-proof, label as cannabis, and include finer details. This means engineered custom packaging every time.
Most brands package all of their created products, whether or not a sale is guaranteed. Of course you do, how else would your products get into customer hands? But each package put on cannabis that expires is technically wasted material. It must ultimately be thrown out rather than reaching customer hands.
Storage and Transportation
Another consideration is the cost of storage and transportation. When larger volumes of cannabis expire in storage, this can equal a significant cost in what you spent to keep the products. Commercial storage space, especially space that is zoned or will accept cannabis as the contents, is not always cheap or easy to find. Likewise with services or drivers who will comfortably transport your cannabis between facilities or out to local dispensaries.
One of the worst things about expired inventory is that it takes up the maximum amount of storage cost for its volume. After all, it sits in your storeroom or warehouse for the longest possible time before you throw it away.
Finally, there’s disposal to consider. Cannabis is classified as a controlled substance, even where recreational use is legal. This means that you can’t just chuck your expired product into the nearest dumpster and call it a day. Dispose of cannabis like a medication, which means contracting with a medical disposal service.
Each disposal is a pickup order and many services charge by weight as well as number of pickups. The more cannabis you must dispose of, the more medical disposal costs you incur.
Plan Ahead Carefully to Avoid Cannabis Inventory Waste
The cannabis industry is in a constant state of flux. Every state is changing differently as the laws evolve to support or challenge the system. You never know when the playing field is going to change again, the costs that change will incur, or even if that change is for better or worse. For example, part of the reason Canopy Growth is closing greenhouses is because outdoor cultivation has been legalized, and is more affordable in the long-term. Good in the long-term, but costly to adapt this year.
The good news is that savvy grow-op owners can plan for the future like any other retail supplier. Look at the numbers and watch not just where dispensaries are opening, but how many people are buying. Don’t expand too fast, and only increase your inventory size when there is a demand to meet your growing supply.
Sound Financial Advice for Cannabis Business Owners
Here at Northstar Financial Consulting, we know it can be challenging for Cannabis entrepreneurs, business owners, and industry leaders to get the kind of sound financial advice you need. Financial professionals and institutes often shy away from this brand-new and legally complex industry. That is exactly why we’re here to help.
Whether you need CFO services or someone to help you look over the trends and plan for next quarter’s inventory, we’re here to help.