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How Cannabis Retail’s First Year Shook Out

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Cannabis has been legally available to Canadians since October 2018, when Canada legalized its recreational use. This year, in October, the country added edibles, concentrates, beverages, and various other forms in the legally allowed marijuana category. Let’s see how marijuana retail has performed in the last year and what we can expect after Cannabis 2.0.

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What happened with cannabis producers’ performances in 2019?

Cannabis companies had a disastrous year in terms of revenue and profitability in 2019. We saw marijuana companies blaming regulatory issues for causing a delay in the opening of legal stores. After legalization in 2018, cannabis companies increased their production capacities to match demand. However, the lack of legal stores resulted in supply concerns. Hence, consumers had no choice but to turn to the illegal marijuana market. Thus, cannabis sales declined in Canada. Furthermore, companies focused on building more production facilities to be ready for the Cannabis 2.0 market.

A MarketWatch report stated cannabis companies’ views about disappointing results this year. It said, “[T]he market opportunity today is simply not living up to expectations, and at the risk of oversimplifying, the inability of the Ontario government to license retail stores right off the bat has resulted in half of the expected market in Canada simply not existing.”

Similarly, Tilray’s management also said a supply-demand imbalance is a concern. Meanwhile, in the US, marijuana companies have struggled to launch their products, as the FDA is still hesitant to allow CBD-based products. Cronos’s management feels the infrastructure for the recreational marijuana market is still in its infancy. However, these companies are hopeful about the Cannabis 2.0 expansion.

A Seeking Alpha article also discussed that the fate of the three big cannabis companies Aurora Cannabis, Canopy Growth, and Cronos would depend on the pace of cannabis retail store openings.

Let’s take a look at how the marijuana retail market performed this year.

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Cannabis’s retail performance in the first year

On December 11, Statistics Canada released a report detailing how the cannabis retail market had performed in the first year. According to the report, despite the struggles, Canada successfully opened 400 brick-and-mortar stores and saw $908 million in online and retail store sales. Online sales represented around 13.3% of total retail sales.

Out of the three largest provinces, Ontario earned the highest $217 million in sales. Alberta and Quebec followed with $196 million and $195 million in sales, respectively, from October 2018 to September 2019. However, Ontario, despite being densely populated, reported lower per capita sales of $15. Per capita sales are the total sales of the region divided by the population. In comparison, the Yukon, which is the country’s least-populated region, reported the highest per-capita sales of $103.

So what caused this to happen? The report specified that access to cannabis stores was one of the most significant factors of lower per-capita sales. Again, various headwinds affected access to cannabis in the regions, according to the report. They were as follows:

  • Administrative and operational steps required to establish a cannabis retail store.
  • The immediate or staggered entry of retail operations over the year.
  • Competition from illegal markets.
  • Density and distribution of the population and stores in a given region.
  • Demographic and income factors.
  • Disruptions in the supply chain.
  • Differences in the regulatory approaches pursued by regional governments.

The retail store structure consists of private, public, and hybrid stores.

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Can we expect a turnaround in 2020?

It appears marijuana companies have taken note of this year’s issues and are now ready for the next phase. Via strategic acquisitions, they’ve positioned themselves for the development and production of high-quality and differentiated cannabis products. A Seeking Alpha article discussed how Aurora is working on doubling up its production capacity from its fiscal 2020 first-quarter figures. Meanwhile, Canopy is working on product innovation and growth strategies to benefit from Cannabis 2.0 expansion in 2020.

Despite vaping-related concerns, marijuana companies are launching vape products in 2020. Recently, the CDC concluded that most EVALI cases were the result of illegal vape devices. Hence, marijuana companies have been working on developing high-quality vape products. Canopy’s ex-CEO, Bruce Linton, also believes the right products will help tackle vaping concerns and also the rising black marijuana market.

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Many industry experts believe 2020 will be a fruitful year for marijuana companies. These companies have been working on increasing their production capacities to meet the demand for edibles and beverage products. A Deloitte survey shows that the edibles and beverage market in Canada could reach 2.7 billion Canadian dollars annually.

Demand isn’t the problem. The problem—like last year—is the presence of legal stores. However, the Canadian government recently announced that it was working on easing regulations so that more retail stores could be opened to match demand. Ontario has reported a low number of retail stores, so the Ontario government is now getting more lenient with its retail marijuana laws. The three largest provinces, along with Manitoba, will see new products soon. Additionally, Statistics Canada also said Canada had seen an 88% rise in the number of legal stores from 217 in March 2019 to 407 in July 2019.

Are Cannabis 3.0 and 4.0 in the cards?

Many industry experts believe that if Cannabis 2.0 kicks in, Canada won’t take much time to launch Cannabis 3.0 and 4.0. Linton also thinks Cannabis 3.0 will be focused more on quality, research, innovation, packaging, and product differentiations. Previously, I discussed how Cannabis 3.0 could be on the horizon.

I also feel Cannabis 3.0 and 4.0 could focus more on understanding the medical benefits of marijuana and working on developing better medicinal marijuana products. Now that we know medical marijuana is helping with many health issues, further research can tackle some of the side effects or how to get the dosage right. The study will also help us understand how marijuana and its various forms affect people differently. Meanwhile, in the US, there’s still no support from President Trump for marijuana legalization.

Meanwhile, marijuana companies need to recover from their losses to focus on the future. Cannabis players Aurora Cannabis (ACB), Canopy Growth (CGC) (WEED), and Cronos (CRON) have reported negative profitability in recent quarters. In comparison, Aphria (APHA) is in a better place. Cannabis companies’ stocks also suffered this year. Year-to-date, ACB is down 61%, while CGC is down 29%. Meanwhile, Cronos and Aphria have also lost 34% and 14%, respectively, as of December 27, 2019.

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