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The ongoing rationalization of the Canadian cannabis industry

The ongoing rationalization of the Canadian cannabis industry

The Canadian cannabis industry continues to recover from a hangover induced by the over-exuberance of 2017 and 2018. The latest demonstration of this is Canopy Growth selling its 28 cannabis stores as part of its efforts to achieve profitability. While likely a necessary move, it is striking that Canopy bought the seven-store Tokyo Smoke retail chain in 2018 for $250 million or about $35 million per store. According to an analyst, the proceeds from selling Canopy’s entire chain of 28 stores will be about $10 million.

Investors have not had much to cheer about with the Canadian cannabis industry since its legalization in 2018. Today’s challenges result from heavy stock promotion and overcapitalization before the sector was well understood. Not unlike the early days of internet-related stocks, investors were willing to fund every cannabis idea presented. The premise was that those companies that built the most growing capacity and were positioned in every industry segment would win. In the case of Canopy, it has made 14 acquisitions since inception for about $2 billion. Aurora, another early cannabis leader, spent an estimated $3.8 billion on 16 acquisitions that included other cannabis companies, a greenhouse designer and an appliance for growing cannabis at home. Aurora also made an investment in the liquor and cannabis retailer Alcanna, which it divested from in 2020.

Today, the cannabis land grab in Canada is over, and many companies have reduced or sold-off excess facilities and peripheral businesses. The promises made by stock promoters, including cannabis company executives, went up in smoke due to outlandish market forecasts, strict market regulations and bungled retail store rollouts. Investors took the hit for this with the Canadian Cannabis LP Index, as published by New Cannabis Ventures, down 69% from a year ago and 94% from its peak in 2018.

Unfortunately, the poor performance of the Canadian cannabis stocks obscures the robust nature of the industry itself.

Recreational cannabis is a significant and growing consumer products market that would be attractive to investors if not for the over-promotion and buoyant financing at its inception. In 2021, Canadian retail cannabis sales were $3.8 billion, up 217% from $1.2 billion in 2019. ATB Capital Markets has predicted that the market will grow to $12 billion by 2030 and have an addressable consumer market of 10 million. Consider that Canadian beer sales in the past year were $9.2 billion.

Looking ahead, I expect that most Canadian cannabis companies will apply the tried-and-true techniques from the consumer products industry. This includes resource planning based on actual demand and applying consumer research to optimize product design and marketing (within the restrictions imposed by Health Canada). This is starting with the management teams that created the cannabis bubble now out of the picture, and more companies are led by teams with consumer industry experience. There will also continue to be rationalization in the industry as companies align their businesses to the market, and those that can’t compete will leave.

This seemed to be Canopy’s approach when it commented that selling its stores “reinforces the Company’s focus on advancing its path to profitability as a premium brand-focused cannabis and consumer packaged goods (CPG) company.” Time will tell whether this switch from its earlier land grab strategy will pay off for investors.


Written by Craig MacPhail | Larry Markowitz

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