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CBD Industry Analysis: 3 Ways the Bubble Will Pop
Research predicts that U.S. CBD sales will surpass $20 billion by 2024. Our own analysis found over 9,400 registered CBD companies in the U.S. That’s more than the 2,300 brands that we saw the previous year and the 60 brands we noticed the year before. However, despite the significant growth that’s happening in the CBD industry, the market’s competitive bubble will soon burst.
The Main Factors Driving Competition
The warnings the FDA is sending to disreputable CBD brands are already weeding out some of the more unscrupulous businesses. At the same time, both sides of the cannabis industry are seeing massive layoffs, with overzealous growth projections cited as a significant factor. Entrepreneurs who put time and money into establishing their businesses are repeatedly seeing rivals open up next door. And their competitors are offering cheaper prices, forcing startup leaders out of business when consumers opt for substandard items.
The illicit cannabis trade is also a stiff source of competition, particularly in states like California, where obtaining a license to trade legally can cost up to $1 million. Faced with this barrier, many sellers who can’t find investors decide to sell products illegally. And research suggests that consumers are still more likely to purchase marijuana from illicit vendors than legal stores. Meanwhile, licensed dispensaries that pay taxes of up to 70% and that offer safe products cannot compete with a thriving black market.
But many business owners hope the CBD industry will begin to refocus in 2020 and that the ratio of reputable brands to unreliable (or illicit) ones will increase. As the market moves on from a challenging year, the industry expects companies that concentrate on steadily building their infrastructure, acquiring certifications, and doing things the right way to survive. Elsewhere, brands that build their business model on extracting as much profit as possible will begin to leave the market.
Why Is Market Saturation Bad for Consumers?
Right now, market saturation is terrible for consumers. Too many brands, unregulated products, and competing sources of information make the CBD industry overwhelming for most users.
This impact is reflected in the national decline that we’ve noticed in the purchase of CBD products despite the rapid increase in vendors. As consumers lose faith in the CBD industry, they simply stop buying the products that come out of it. But there’s is hope.
This downward trend should reverse as the CBD industry becomes more professional and consumer confidence returns. However, the CBD industry must place an emphasis on recognizing ethical brands, improving service, and demanding store owners to educate themselves so they provide reliable advice.
This professionalization will likely coincide with the popping of the ‘CBD bubble.’ Consumers and brands alike will benefit from a less saturated and more informed market. But it will come at the cost of many existing companies.
How Will the CBD Industry Bubble Pop?
Based on current trends, we expect the CBD bubble to pop slowly over the next five years. Though predictions have their limitations, we’ve identified several ways that the CBD industry will contract.
1. Bad Management
We’ve already seen large companies flounder due to poor decision-making. In these cases, industry experts, perhaps without the proper business experience, receive large amounts of investor capital. Then, they undertake huge expenditures, beliving the assumption that the CBD industry will boom faster than it does.
Companies like these acquire tens-of-millions of dollars in investment and spend much of it on large salaries, extravagant infrastructure, and unnecessary hires. But when this “build it and they will come” mentality doesn’t yield results, the companies find themselves with huge amounts of debt and several dissatisfied stockholders.
Typically, the next step is to drastically scale-back operations and remove the CEO. But then the remaining stockholders are without the industry knowledge to seize operations themselves. In many cases, investors pull out whatever funds they can and leave the company to collapse.
In a competitive market, the industry will likely see more CBD companies with similar processes merging to consolidate their positions.
Last year, the CBD industry saw Cresco acquire CannaRoyalty in a stock transaction valued at $825 million. Shortly after, a company called Harvest Health & Recreation announced its acquisition of Verano Holdings, a multi-state operator in the CBD industry, for $850 million.
Forbes claims the cannabis market is “ripe for significant consolidation” and that mergers like this will probably become more commonplace. As it stands, there are too many companies — both large and small — with licenses to sell cannabis. And at the top end, over 50 of them are publicly-traded. As those companies struggle to compete and justify their large valuations, many companies will turn to consolidation to survive.
FDA regulations will also bring visible changes to the CBD industry.
Legislation recently introduced by the U.S. House Agriculture Committee could force companies to treat CBD products as dietary supplements. If passed, this increased regulation would make CBD products safer and prevent vendors from selling low-quality or mislabeled goods.
In November, the FDA stated that CBD was not generally recognized as safe (GRAS), undermining the entire market. But, by forcing out unscrupulous actors, increased regulation would legitimize the CBD industry and reinforce consumer confidence.
Still, if people currently use CBD and don’t want to wait for legislatures to point to good products, they might be left wondering: which current brands are likely to survive the cull?
Choosing a Brand That Will Be Here Tomorrow
We don’t know which CBD brands will survive. Unfortunately, the market is too unpredictable to choose which brands are safe. The best advice that we can give consumers is to pick the company they believe is conscientious and whose products they’re happy with.
The desaturation of the CBD industry seems unavoidable, but it will be good for consumers in the long run. And in the short-term, desaturation provides a unique opportunity for people to shape the market by supporting the companies they love. The CBD bubble may pop, but consumers’ favorite companies in the industry don’t have to get left behind if they’re willing to stand by the brands they enjoy.