Canadians love weed, so why can’t brands stay in business?
Facilities closed due to oversupply. Over-promising products that consumers ultimately didn’t buy. Plunging share prices and profitability still out of reach.
These are some of the problems that continue to plague Canadian cannabis LPs four years after being nationally legalized for recreational use, as producers aim to correct course in a market still riddled with competitive challenges like pricing pressures and strict marketing regulations.
Is too much weed actually a bad thing?
They couldn’t go a month in 2021 and early 2022 without making headlines announcing the closure of another Canadian cannabis cultivation facility. In 2021, Canopy Growth closed its 1 million square foot greenhouse in Niagara-on-the-Lake, a year after it did the same with two BC operations
About 2.7 billion grams (2,976 tons) were grown, but only 450 million grams made it to store shelves — a sales rate of about 20%.
according to data from MJBiz Daily
That same year, Tilray shut down operations in Nanaimo to focus on growing in BC at its Broken Coast facility. In April 2022, HEXO closed its Belleville, Ontario facility to “use other locations with available infrastructure and capabilities to improve manufacturing performance while significantly reducing costs across our network,” said Charlie Bowman, CEO of HEXO, in a press release.
The reasons for all of these closed facilities and laid-off employees stem from an unfortunate trend in the Canadian cannabis market: produces too much weed.
“Immediately after recreational use was legalized in Canada, there was too much optimism, and we just grew too much cannabis,” says Andrew Potter, associate professor and graduate program director at the Max Bell School of Public Policy in Montreal and co-author of High Time: The legalization and regulation of cannabis in Canada.
He further predicts that cannabis will eventually become a commodity, similar to tobacco, where the plant is not grown in greenhouses but mainly in vast fields.
Prices have never been cheaper, but manufacturers cannot move the product
Cannabis producers in Canada have sold less than 20% of their production since the country introduced adult-use cannabis sales in October 2018, according to analysis conducted by reporter Matt Lamers for MJBizDaily.
Of the approximately 2.7 billion grams (2,976 tons) of cannabis in Canada between October 2018 and December 2020, only about 450 million grams made it to store shelves.
We should have seen it coming. Enthusiasm in 2017 and 2018 encouraged investors to fund giant greenhouses, spurred by optimism fueled entirely by how much cannabis could be produced and executive rewards associated with those greenhouse builds.
In the beginning, Canadian LPs built greenhouses that were unsustainable and expensive to manage, says Lucas McCann, co-founder of cannabis consultancy CannDelta.
“But the market shifted 18 months ago where the pendulum swung, not only eliminating bloated middle management and causing foreclosures, but also ushering in price erosion and some very lean teams, favoring micro-producers,” he adds.
Lucas McCann, co-founder of CannDelta
You may have already noticed the price drop at your local cannabis store. According to Statistics Canada, the price of recreational cannabis fell 10% between June 2021 and June 2022.
“You’re seeing an acceleration of irrational pricing, particularly in discount flowers, and we’ve decided to exit certain categories that don’t make sense and are losing money,” Aurora Cannabis CEO Miguel Martin told analysts in February, according to the Globe & Mail .
One such product line is beverages, which still accounted for just 2% of Ontario Cannabis Store’s total cannabis sales in Q3 2021. Star-eyed investors were once excited by the potential of cannabis beverages after Constellation Brands, the US alcohol giant, invested $5.2 billion in Canopy Growth in 2018.
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But the promise of popular cannabis beverages has not been fulfilled, even as Seth Rogen’s Houseplant brand sold a million cans of its cannabis-infused sodas in the country. On the other hand, Houseplant left the Canadian market in 2021, although the departure may be temporary.
So much data, but so little profit
For some LPs, diving deep into drinks and edibles wasn’t worth the risk. “We looked at beverages and edibles, but wanted to focus on inhalable cannabis formats,” said Sophie Pilon, director of investor relations and communications at Alberta-based Sundial.
To counter the market turmoil, Sundial also invested in retailers. They acquired Alcanna, the private liquor retailer with its Nova Cannabis and Value Buds brands, and Spiritleaf retail stores within the last two years.
“Our management team realized that equity investors were the most successful in the cannabis industry,” says Pilon, “and they weren’t necessarily cannabis manufacturing companies, so they decided to start the investment division,” he noted of the launch of a 50/50 joint Ventured with SAF Opportunities LP – a member of Canadian alternative investment management firm SAF Group – through a new entity, SunStream Bancorp.
The added competitive advantage of these hundreds of cannabis retailers now flying under the sundial banner goes back to giving consumers what they’re looking for, she adds.
“The data we get from what we sell in stores is immense, and our analytics department gives us information on what consumers prefer in terms of flavor profiles, which informs our production teams.”
Achieving profitability means recognizing what appeals to consumers, and so far Canadians have been vocal about budget-conscious flowers. Data from OSC.ca revealed that in Q3 2021, nearly two-thirds of online dried flower sales were in the price-per-gram range of $3 to $6.50, while only 8% of sales were on $10 worth of flowers purchased accounted for the $13.50 range.
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Organigram was one of the few manufacturers to grow its market share in 2021, and CEO Beena Goldenberg sees its premium cannabis product, Shred, as a key driver of those sales.
“A lot of LPs don’t have that kind of product, and if they do, they use a miller’s product,” she says, “but we always make sure with Shred that the quality is still going strong and that’s why the demand for it remains high.”
For Sundial, the retail chain of Value Buds outlets appeals to the budget-conscious consumer, Pilon says. Still, they recognize that not every consumer has the same attitude towards their purchases, which may be why Spiritleaf is attracting the premium cannabis customers.
This multi-banner strategy may work for some LPs, but Sundial has yet to turn a profit. The same goes for Canopy Growth and countless other LPs. Stock market watchers have been tracking negative results for LPs for months.
For example, Canopy Growth saw its stock price fall tremendously, plummeting from $67.74 on September 7, 2018 to $4.45 (as of August 15, 2022).
A Canopy Growth spokesperson emailed a statement to Leafly: “Over the past year, amidst a fragmented and rapidly evolving industry landscape, we have taken the necessary actions to strengthen Canopy’s foundation and sharpen our focus on leadership in the Strengthen premium and mainstream in Canada. ”
Bureaucracy comes between producer and consumer
Some industry critics see a major hurdle that continues to hamper growth in Canada’s cannabis space. “Because the advertising and packaging restrictions are so strict, brands have a very limited ability to differentiate and the government isn’t doing anything about it,” says Potter.
“Health Canada does not care about the economic health of LPs. They take care of licensing, background checks, surveillance facilities, but they don’t look at the success of the LPs they approve for licenses.”
– Lucas McCann, co-founder of cannabis consultancy CannDelta
Goldenberg finds it frustrating that LPs don’t have the ability to educate consumers beyond brick-and-mortar stores and age-protected websites.
“The stigma against cannabis still exists in this country because we can’t talk to people who aren’t heavily invested in the industry, such as those who are nervous about using cannabis.
We cannot do anything through broadcast or print media; We cannot use Google or Facebook marketing to cast a wider net with our educational projects. That’s why I get frustrated when I see non-stop online gambling ads.”
There are promising signs that some LPs are on the way this year.
Organigram is spending $38 million to modernize its Moncton facility, increasing its capacity from today’s 40,000 to 70,000 kilograms of flowers per year. Net sales increased by 88% from Q3 2021 to Q3 2022.
In its May 2022 report, Statistics Canada reported that total cannabis sales increased by 20% compared to sales a year ago.
And some slow-moving product lines are gaining traction. A report by Headset found that Canada’s edibles market grew 118% year-on-year in 2021 ($142 million vs. $65 million).
This era in Canadian cannabis is fraught with challenges that will separate the successes from the failures, the forward-thinking brands from those stuck in the past, even if the recent past of 2018 isn’t that far away.
In moments of uncertainty and apprehension, what matters is not just what corporate executives are doing, but how they are doing it, and this kind of progress will be a must-watch for anyone interested in the future of the Canadian cannabis space.
David Silberberg
David Silverberg is a freelance journalist who writes for The Toronto Star, BBC News, The Washington Post, Business Insider, Cannabis Health, Merry Jane, High Times and many other outlets. He is also a writing coach, helping freelance journalists and creatives to advance their careers.
Check out David Silverberg’s articles
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