When Canada legalized cannabis last year there was an initial lack of stores and too much regulation. Now, the country faces a different phenomenon; an oversupply of cannabis.
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While Canada pushed the envelope when legalizing cannabis in 2018, it wasn't without hiccups. There was a lack of brick-and-mortar stores, overregulation, high prices, and as a result, a black market that still thrived.
Now, things have taken a different turn for the Great White North, with companies reporting a massive oversupply of cannabis. Government statistics show that cannabis inventories hit nearly 400 tonnes by the end of August, which some estimates believe could cover over two years of demand.
So what does this mean for Canada and its cannabis consumers and companies? Will oversupply be beneficial for the industry? Or will the mountains of marijuana push prices down too far?
Good or Bad? An Overview of Oversupply
For cannabis consumers, oversupply is generally a good thing. Quebec brand manager of Canopy Growth, Adam Greenblatt, has previously stated that the shelf life for cannabis is about a year, give or take. "The THC (tetrahydrocannabinol) doesn't degrade as quickly, but the subjective quality of it starts to degrade, so we use about a year as a rule of thumb."
While the functionality of cannabis actually lasts much longer than this, the plant begins to lose its fragrance and freshness, which can seem less appealing to consumers.
This means that companies will generally want to get rid of their cannabis supplies as quickly as possible, and will likely lower prices to do so. Players such as HEXO have already begun doing this, selling raw flower at $4.49 per gram, roughly half the average per-gram price on the legal market.
Lower prices are certainly beneficial for consumers, who've typically turned to the black market due to its lower-priced cannabis. This will help to diminish the black market, which currently dwarfs the legal market, with Statistics Canada estimating that roughly 79% of cannabis was still being purchased on the black market as recently as May.
When it comes to cannabis companies, however, oversupply can be both beneficial and harmful. Lowering the prices of cannabis will undoubtedly help to shrink the black market, which will entice more customers toward legal players in Canada's cannabis space.
However, as mentioned, there's somewhat of an expiry date on raw cannabis, which some onlookers believe could spell danger for companies who've overstocked.
I suspect it'll be a race to the bottom with price because everyone now has more than enough supply.Matt Bottomley, cannabis analyst, Canaccord Genuity
Oversupply pushes prices down, lowering profit margins and forcing players like HEXO to cut back on operations.
Last week, the company laid off 200 employees and suspended cultivation at its Niagara facility, as well as stopping cultivation on 200,000 square feet of its Gatineau facility. The company has stated that the suspensions are temporary until more stores open up throughout Canada.
Similarly, Aurora has been selling large swaths of raw flower "wholesale" which some have interpreted as the company's attempt to ditch some of the excess supply at lower costs.
Lack of Stores, Lack of Sales
While the number of cannabis retail stores has slowly increased in Canada, pot producers argue that there still isn't nearly enough.
There are currently only 24 legal retail outlets in Ontario. By comparison, Alberta, which has less than a third of Ontario's population, has issued 324 retail licenses.
As a result, major pot producers are pleading to the Canadian government to speed up the distribution of retail licenses, as they believe much of the oversupply can be attributed to a lack of access for cannabis consumers. Major players such as Canopy, Aurora, HEXO, Tilray and Aphriasent a letter addressed to Trudeau urging for a change in the cannabis space.
Canopy Growth's Chief Executive Mark Zekulin said "Ontario represents 40% of the country's population yet has one retail cannabis store per 600,000 people. When one year into the market the addressable market is nearly half what is expected, there are going to be meaningful short-term problems."
A low number of retail outlets means that should consumers want cannabis, there are few places to go to get it. Undoubtedly, this is a large factor as to why the black market has remained so prevalent.
Canada's government is slowly rectifying the bottlenecks which surround setting up a cannabis shop, such as removing their lottery system and promising to open more stores throughout Ontario.
If the government listens to these major players in the cannabis space, and the number of retail cannabis stores greatly increases, it's likely that pot producers will have added avenues through which they can sell off their oversupply, without such a desperate race to the bottom.
Legalization 2.0: A Sweet Future
There's more than one way to skin a cat and more than one way to get stoned.
Precisely one year after legalizing cannabis, Canada set in motion its second phase of legalization, which saw that cannabis edibles, extracts, and concentrates would be made legal for consumption and purchase.
The second phase, known as legalization 2.0, was launched on October 17th this year, with new form factors set to hit stores by December.
With a wider array of form factors, Deloitte identified in their 'Nurturing New Growth' report that there is an untapped demographic of "likely users" who are going to be slightly older, more conservative, and who are looking for ways to get stoned without smoking.
Using an online survey of 2000 people, Deloitte identified that likely users were most looking forward to cannabis edibles, topicals, and beverages, all of which will require raw flower to produce.
For cannabis players with excess supplies of raw flower material, they can use their oversupply as the starting point for a wider range of form factors in the hopes of tapping into this new audience.
Not only that, but cannabis use in Canada is increasingly generally, which suggests that the severity of the oversupply may decrease in the future.
According to Statistics Canada, 18% of Canadians aged over 15 reported using cannabis in 2019. This is up 14% since the first quarter of 2018, the year that cannabis was made legal.
When factoring in the new form factors, a growing audience, more retail stores and legalization 2.0's untapped demographic, there may soon be a level of demand that meets pot producers' copious supply.
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