Corinne S Kennedy
| Memphis Commercial Appeal
The middle of a pandemic isn’t the ideal time to ramp up a new business, but for Bill Margaritis, CEO of Hemp2Lab in Rossville, there have been some benefits.
COVID-19, which hit in the middle of the construction of Hemp2Lab’s laboratory, threw established players and small upstart businesses across the hemp and CBD industries into chaos, forcing many to close and knocking out potential competition.
“There was a lot of destruction in the marketplace in terms of competing labs and businesses going bankrupt,” Margaritis said. “There’s a lot of what I would call carnage in the industry.”
The vertically integrated “seed to shelf” company, which extracts CBD oil from hemp and manufactures private label and white label CBD products, was recently awarded $50,000 by the Tennessee Agricultural Enterprise Fund. The cash lends credibility and helped purchase machinery, Margaritis said, both essential in the current unstable market.
Previously: Tennessee sees explosion in number of hemp farmers. But will too few processors spell trouble?
Local business news: Amazon planning another delivery facility near Memphis fulfillment center
The pandemic has impacted every part of the multi-faceted hemp industry. Strange economic circumstances and the U.S. Food and Drug Administration not yet issuing guidance on edible products have created uncertainty for businesses across the country.
In Tennessee, that has been coupled with a pre-existing oversupply of biomass and extracted oil and the natural contractions seen in boom industries. The result: substantial economic difficulties, even while retail sales of CBD products continue to grow nationally.
One measure of the carnage is the number of licensed hemp farmers in the state. In October 2019, there were 3,730. By last month, that number had almost been cut in half, to 1,888, according to the Tennessee Department of Agriculture.
“It’s a healthy consolidation of the market,” she said in a statement. “It’s much more accelerated than people expected, but you can’t have this many players and have a healthy market. There was going to be an extinction event, and it turned out to be COVID.”
Margaritis said for Hemp2Lab, the wave of business failures is more an opportunity than an indication of risk.
Memphis development: Here’s what incentives One Beale developer is seeking for the 350-room Grand Hyatt hotel
More: U of M changes plans for Deloach Street housing, plans 500-bed complex on Park Avenue Campus
Sales soar but prices plummet
The boom in farmers and the relatively small number of processors the state saw last year led to a bottleneck with too much product and too few people to turn it into the tinctures, gummies, bath products, lotions and other hemp-derived items customers want to buy.
Oversupply led to a dramatic decline in the price of the crop, giving processors their pick of the product they wanted to buy at the price they wanted to pay. The trend has largely continued this year.
The state does not require licenses for manufacturers and processors, only farmers, people who transport hemp and those who manufacture edible products, so it is not clear how many active manufacturers and processors there are approaching a year after the start of the pandemic.
Research conducted by Brightfield Group shows anxiety — reported levels of which have increased dramatically in 2020 — is the No. 1 issue CBD users cite for why they use CBD products and 39% of people surveyed said they have upped their consumption due to the pandemic.
However, retailers, including some of the largest national brands, like Charlotte’s Web and Green Roads, cut their prices as unemployment rates rose and disposable income dried up for many Americans, according to trade publication Cannabis Business Times.
CBD sales in 2020 will be well below what was expected at the beginning of the year but are still projected to increase from $4.1 billion in 2019.
Previously: Tennessee’s hemp industry has seen huge growth. Will new federal regulations slow it down?
Local business news: Even in the pandemic economy, new retailers are opening in East Memphis
Collin Bercier, owner of Ounce of Hope on Cooper Street, said he saw sales cut almost in half the first few months of the pandemic, but starting in September he started to see an uptick. By November business was almost back to normal.
“We’re seeing a ton of new customers,” he said. “And our Black Friday sales were probably the best sales we’ve had in the past two years.”
CBD shops, like any other retail operation, have been forced to do more business online. According to Brightfield Group, nationally, 47% of CBD purchases were made online in the first quarter of the year and 41% in the second quarter of the year.
Bercier said he is seeing more online orders and some people are placing orders on the phone and then using curbside pickup. But there are still plenty of people who want to come into a store and talk with a sales associate before buying a CBD product — especially first-time CBD users.
“We never really closed, we took all the COVID precautions and still do. We’re able to facilitate curbside and limit the people in the store,” he added.
More: Memphis biotechnology firm gets $52 million tax break as it plans $212 million expansion
COVID-19 news: Memphis hospitals are being stretched thin as COVID-19 cases rise. Here’s how they’ll cope
Lack of regulation adds instability
In a retail landscape where bad products abound due to lack of regulation, Bercier believes the ability to control his own product from plant to finished product and provide transparency for customers ensures a path through the pandemic and beyond.
Margaritis said Hemp2Lab uses QR codes to allow customers to easily pull up ingredient lists for products and, as it built out this year, has kept an eye on what the FDA has hinted will come when comprehensive regulations are issued.
“When the FDA does issue their rules, we believe that will be a day of reckoning,” he said. “A lot of the players in the industry will not have the ability to meet the new stringent compliance requirements.”
Hemp farming and products derived from hemp were legalized with the passage of the 2018 Farm Bill, but the FDA has, as of yet, offered almost no guidance on ingestible CBD products. The agency has justifiably been focused on COVID-19 this year as it has reviewed new drugs and vaccines.
Douglas Throckmorton, deputy director of regulatory programs at the agency’s center for drug evaluation and research, said in November the FDA was “actively exploring regulatory pathways for lawful marketing of hemp-derived products or drugs.”
When those regulations are issued, it could prove to be another culling event for the industry, proving that the wave of business closures seen during COVID-19 was the canary in the coal mine for an over-leveraged industry.
Corinne Kennedy covers economic development, soccer and COVID-19’s impact on hospitals for the Commercial Appeal. She can be reached via email at [email protected] or at 901-297-3245.