CBD Industry Analysis: Is the CBD Bubble Ready to Pop?

Forecasts predict the market for CBD sales in the USA will be worth more than $20 billion by the year 2024.

During our own analysis, we found that there are over 9,400 CBD companies registered in the US - compared to around 2,300 the previous year and just 60 the year before that.

But the bubble is popping. Some vendors are passionate about the power of CBD but plenty just want to make a quick profit and flee the market. Anticipated FDA regulations will likely weed out some of the more unscrupulous businesses, while others have already fallen victim to the loss of ‘cashless ATM’ facilities in California.

Huge layoffs have been seen on both sides of the industry, with competition cited as a big factor. Merchants putting much time and money into establishing their businesses have repeatedly seen rivals open up next-door and sell inferior products for cheaper prices - and then gone out of business when consumers have opted for those products instead.

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 are unable to find investors decide to sell illegally, and it’s estimated that consumers are still more likely to purchase marijuana from illicit vendors than legal stores.

Meanwhile licensed stores which pay taxes of up to 70%, and whose products are tested to ensure they meet safety standards, cannot compete with a thriving black market.

But it’s hoped the CBD industry will begin to refocus in 2020 and that the ratio of reputable traders to unreliable (or illicit) ones will increase. As the market moves on from a difficult year, we expect companies that have concentrated on steadily building their infrastructure, acquiring certifications and doing things the right way to survive. Elsewhere, businesses whose models are based upon extracting as much profit as possible before shutting down operations should begin to leave the market.

Why Is Market Saturation Bad for Consumers?

But for now, market saturation is a negative for consumers. A huge number of brands, competing sources of information and the presence of shoddy, unregulated products make the CBD industry overwhelming for most users.

This is reflected in a national decline in the purchase of CBD products despite the rapid increase in vendors. As consumers lose faith in the industry, they simply stop buying.

The trend should reverse as the CBD industry becomes more professional and consumer confidence returns, but emphasis must be placed upon recognizing ethical brands and improving service; store owners need to educate themselves so that they can give their customers reliable advice.

This professionalization will likely coincide with the popping of the ‘CBD bubble’. The move to a less saturated, more informed market will be beneficial for consumers, but will come at the cost of many existing companies.

How Could the CBD Bubble Pop?

Based on current trends, we expect the CBD bubble to pop slowly over the next five years. Though predictions have their limitations, it’s already possible to identify several ways the industry is likely to contract:

Bad Management

We’ve already seen large companies flounder due to poor decision-making. In these cases industry experts, perhaps without the requisite business experience, received large amounts of investor capital and undertook huge expenditure, based on assumptions that the industry would boom faster than it did.

Companies have acquired tens-of-millions of dollars in investment and spent much of it on large salaries, extravagant infrastructure projects and hiring staff before they were needed. And when this “build it and they will come” mentality hasn’t yielded results, they’ve found themselves with huge amounts of debt and a number of 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.

Consolidation

In a competitive market, we’ll likely see more companies with similar processes merging in order to consolidate their positions.

Last year saw Cresco acquire CannaRoyalty in a stock transaction valued at $825 million. Four weeks previously, a company called Harvest Health & Recreation announced its pending 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 common. As it stands, there are too many companies - both large and small - with licenses to sell cannabis; at the top end, over 50 of them are publicly-traded. As they struggle to compete and justify their large valuations, many will turn to consolidation in order to survive.

Regulation

Anticipated FDA regulation will also bring visible changes to the industry.

Legislation recently introduced by the U.S. House Agriculture Committee could lead to hemp-derived CBD being treated as a dietary supplement. If passed, this increased regulation would make CBD products safer and prevent vendors selling low-quality or mislabelled 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 you use CBD now and don’t want to wait for the industry to be restructured, you might be left wondering: which current brands are likely to survive the cull?

Choosing a Brand That Will Be Here Tomorrow

The honest answer is: we don’t know. Unfortunately the market is too unpredictable to choose a brand whose survival is assured, and the best advice we can give is to pick one you believe is conscientious and whose products you’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 it provides us a unique opportunity to shape the market by supporting the companies we love. The bubble may pop. But the industry left behind will be better for it.