LAST year was pretty dreadful for many Canadian cannabis companies and their investors – and 2020 is not looking much better.
The new decade has got off to a woeful start with Aurora losing its co-founder and Chief Executive Terry Booth, whilst announcing a loss of US $750 million.
Tilray recently announced a fall of over 8% in last quarter revenues, and Canopy Growth is to close two cultivation facilities in British Columbia, axing 500 jobs, whilst announcing potential write-downs of over $550m.
One of the biggest challenges companies face is the price and quality of the legal cannabis. Despite legalisation in October 2018, the black market still dominant.
James A Smith, Chief Revenue Officer at emerging Canadian cannabis firm 4C Labs, says: “I do not know anyone who buys their cannabis on the legal market, it’s horrible.
“The reality is that there products are not in demand because of the quality and they are blaming distribution (a lack of stores) for all of their woes.
“Investors assumed that companies who had been in the medical game were going to dominate the recreational market and that just simply hasn’t been the case.
“I don’t know anybody who buys weed from a Government store. The quality is terrible.”
Recent figures show the ‘black’ and ‘grey’ markets continue to cater for the needs of the majority of Canada’s cannabis consumer users, while many leading companies say this is compounded by a lack of retail outlets.
While acknowledging this has some merit, Mr Smith believes it is being used as a smokescreen for a litany of inadequacies.
In fact, he goes on to say that today’s leading industry players – exclusively Canadian – will not be around in a few years time.
“The big producers paid too much for assets that are not producing quality product. Their whole systems of production cannot produce a quality product and as the Canadian consumer is becoming much more sophisticated they are increasingly aware of that.”
He went on to say there are some key structural issues with these businesses in the type of growing equipment, where they are growing and seed genetic quality, they’re ‘too focused on economies of scale’.
Analysts at Mackie Research pulled no punches when summarising the 2019’s pitiful results from the Canadian sector.
Calling their cumulative performances as ‘disastrous’ they speculated on which companies will still be standing in a year’s time.
They estimated that 21 out of 50 publicly-traded cannabis companies analysed have less than six months of cash left to burn.
Other analysts say they expect 30 to 40 per cent of cannabis companies will ‘soon become distressed, go bankrupt or be acquired by another company’.
And, a third, reckons that within five years there will be just eight main Canadian cannabis companies standing.
From riding an investment and valuation wave this time last year the turnaround has been rapid and dramatic.
Stocks prices have plummeted by, on average, 50% and problems have been piling up one after the other, pretty muck like the bloated inventories of unsold pot, many companies currently sit on.
Somewhere, or another, executives at Canada’s leading Licensed Producers will have flagged-up at least one of the following in recent months;
-A shortage of stores
-Restrictive rules on brand development
-Rising stock levels
-Black Market competition
-Sluggish – and sometimes negative – revenue growth
-An inability to make profit
-A lack of fresh capital
-Little appetite for deals
-The U.S. vaping crisis
-Cultivation cut backs
-Leading to job cuts
The market environment has changed dramatically and there is no longer any appetite to fund speculative growth based on over-ambitious projections.
Investors are tired of over-zealous executives trumpeting profitable futures with the focus now shifting to consolidation and balance sheet stability.
And, there are the economic and social effects of Covid-19, as it narrows most citizen’s focus from global growth to domestic safety, whilst curtailing business ambition.
However, while hunkering down through this multi-pronged 2020 attack many still believe in a prosperous future for Canada’s cannabis industry.
New Frontier Data estimates that 1.5 million adults consumed legal cannabis in the first year of legalisation, with that total expected to reach 7.3 million by 2024, with annual revenues more than doubling to C$5.8bn in that time.
The launch of Canada 2.0 cannabis products such as edibles earlier this year will boost revenues and this diversification into new products is matched by concerted efforts at geographical diversification.
Many of Canada’s leading cannabis companies have expanded into Europe; a market which is expected to surpass North America’s in size, and many are also investing in the U.S. CBD market which is experiencing a massive boom.
As Matt Benjamin from the InvestmentU website points out cannabis is still a ‘nascent industry with a bunch of problems yet to solve’.
He says the institutional investors will eventually arrive and says there is ‘little doubt the cannabis industry will continue to grow’.