Too many producers: Analyst says market needs some pot growers to go out of business
Credit to Author: Nick Eagland| Date: Sat, 11 Jan 2020 02:45:15 +0000
A cannabis conference brought bright, smiling young entrepreneurs to Vancouver this week but also analysts warning that the fledgling industry can expect more tough times in 2020.
Many vendors at the Lift & Co. Cannabis Business Conference & Expo were talking Friday about “Legalization 2.0,” the second phase of the federal government’s regulation of recreational cannabis that brought edibles and extracts to store shelves around Christmas.
But after months of layoffs, facility shutdowns and tanking stocks, those products won’t be enough to save the industry, analysts warned.
On Thursday, a Piper Sandler analyst sent a note to clients downgrading licensed producer Aurora Cannabis Inc.’s stock to what amounted to a sell, lowering the target price from $3 to $1. In November, Canopy Growth Corp.’s share price hit a 2019 low after it posted a $374.6-million quarterly loss, missed analyst revenue estimates and warned that a key revenue target may not be achieved.
Craig Wiggins of the independent analysis firm TheCannalysts brought more doom and gloom during a presentation at the expo on Friday.
By the end of October, licensed producers were storing 721 days of inventory, he said. That could hit 816 days a year from now, according to his optimistic forecasting.
“This will be catastrophic unless certain things happen,” Wiggins said. “More retails stores and ‘2.0’ does not fix this. Something has to give. We need companies to go out of business. It sucks to say it, but we need a rightsizing of the harvests. We need people to write off inventory.”
Wiggins said Canada’s licensed producers had good growth in sales by volume after legalization, up 25 per cent between October 2018 and February 2019, and 109 per cent between March and August. But growth then flattened to about one per cent between August and October 2019.
“That is far from the market that all the big firms were telling you about,” he said.
“A big part of why we haven’t rolled out well is there isn’t access to stores, there isn’t enough 2.0 product out there, price, quality, convenience.”
Lucas McCann, chief scientific officer for Canndelta Consulting, at Lift & Co. Cannabis Expo at the Vancouver Trade and Convention Centre on Jan. 10, 2020.
Meantime, licensed producers continue to harvest at a rate that far exceeds legal sales, about 4.42 kilograms for every kilogram sold, Wiggins lamented.
“The optimistic scenarios get us to 2.26 — that’s still way too high,” he said. “We have too much inventory.”
Wiggins said cultivation must be throttled back, inventory destroyed, or sales must increase to an “impossible” level.
“Plus, you know what? The unregulated market is good at keeping clients,” he said. “Exports simply will not fix this problem. They’ll be too late and not enough. We have a massive issue that we have to deal with.”
Lucas McCann, chief science officer at CannDelta Inc., a cannabis consulting firm, said regulatory framework involving multiple levels of government is complicated and not working well, creating delays of up to a year before producers can get Health Canada approvals.
“Then, once licensed producers do become licensed, there is nowhere to move the product,” Mc Cann said. “There are bottlenecks everywhere throughout the system.”
B.C.’s requirement for security background checks for retail store employees has delayed the hiring of staff, making it even more difficult to get product to market, he said.
“When we go and do site audits and inspections for a lot of the facilities, (we are) looking at non-compliance because they’ll have so much product, their secured storage will be absolutely filled,” McCann said.
“It’ll be stored in the hallways and they’ll be conducting activities in rooms that aren’t licensed for those activities. They’re doing this because they’re trying to stay afloat. They continue to harvest and they must harvest — they’re paying these staff.”
McCann said the introduction of extracts and edibles to the market will help ease some of the industry’s woes.
“But we’re also seeing that there are a lot of people flooding the market right now, trying to still get licences and do massive growth,” he said.
“That is impacting the stock market price so we’re going to see a lot of correction over the next few months, we’re going to see a few bankruptcies, we’re going to see a few people really solidify their position in the market and probably a few mergers and acquisitions.”
Elisabeth Stahura, president of the Colorado-based BDS Analytics, said her firm sees Canadian firms facing the same challenges experienced by U.S. states as they transitioned from medical cannabis to adult-recreational use in recent years.
“B.C. continues to have a very thriving legacy channel and legacy market,” she said. “It’s very similar to what we see in California. Two years out of the gate of adult-use legalization, 75 per cent of the sales are still going for that legacy market, so what you see is a stunting of the market in California.”
Stahura said California growers and retailers are at a continued disadvantage, compared to illicit sellers, due to higher costs and regulations requiring them to test products.
“From the consumer standpoint, it’s very difficult to differentiate between the regulated product, from their perspective, and the legacy product,” she said.
Stahura said high taxes on vaping products in B.C. — 20 per cent PST — will challenge the sales of one of the cannabis-derivative products most popular in the U.S. As well, the slow opening of stores, particularly in Ontario, will lead to more “bumps along the road,” she said.
“All that said and done, we do predict Canada 2020 sales to be about $2.6 billion, so that’s a pretty strong growth rate from the about $1.7 billion that we saw in 2019,” she said.
“So it’s not all doom and gloom.”