State of Canadian Cannabis — 2021
2020 was a rollercoaster year for Canadian Cannabis, like most business sectors.
There’s a lot to be excited about in 2021. Here’s the good, the bad, and the opportunities for growth in 2021 as I see them.
The Good
The market has been steadily growing since legalization, and still has plenty of room left to grow as it matures. Even in an extremely turbulent year with a pandemic and economic headwinds, we’ve seen great growth.
The country has seen an average of a 10% increase each month in the number of patients signed up to receive medical cannabis. Recreational sales reached $270 million in October 2020 as the pace of total monthly sales growth accelerated to 5.1% nationwide. That’s an annual run rate of $3.24 billion. Ontario led in terms of monthly sales growth, with October sales increasing by 7.6% over September to $83.9 million. ArcView Market Research expects the recreational market to reach over $3 billion in 2021 (a CAGR of 77.9% from 2018–2021). CIBC analysts put that figure closer to $4 billion.
COVID-19 hasn’t impacted the consumer market at all in terms of sales; people tend to consume pot (and alcohol) at steady numbers no matter the economic conditions. Cannabis retailers were actually designated as essential services by the government; from Illicit to essential in 2 years.
The Bad
The year has not been without turbulence and negative news. The fallout from high valuations early in the cannabis boom is becoming apparent, and COVID made growing and distributing much harder. We’ve seen mass layoffs across most major LPs and downsizing and shutting down facilities.
The illicit market has lost some market share but remains resilient; LPs have turned to low-margin, commoditized, value priced dried flower to compete. This is why margins have been low, and why revenue figures have been poor, despite retail sales hitting all-time highs.
Even though Canada is the first industrialized country to green light recreational cannabis, we’ve failed to build a “coca cola of cannabis” — recognizable brands that have global potential (largely due to advertising restrictions), and we’ve failed to provide the blueprint for other countries to follow. I think it’s safe to say that at this point we’ve blown our lead on the world stage.
Outlook for 2021
We’ll see further consolidation, bankruptcies and mergers among LP’s. Expect more deals like the Aphria/Tilray merger and takeovers by well capitalized players with healthy balance sheets.
There will be more ‘asset shedding’ as a way to streamline and focus — the recent canopy rivers / canopy growth deal is a good example of this.
Exports from Canada will grow, albeit at a slower rate than executives hoped; the demand is smaller and competition is bigger than anticipated.
Domestically we no longer have a distribution issue because of restrictions on retailers/licenses, and more stores will continue to come online (we could actually move to over saturation in some areas).
Recreational sales will continue to grow as forecasted.
New production and product innovations will roll out, with advancements like nanotechnology for reduced onset time.
More value-added (2.0) products will come to market; beverages, extracts, and gummies. Stats Canada’s latest sales and inventory numbers for September 2020 show that interest in dried cannabis is relatively steady, whilst appetite for extracts and edibles is increasing. We’ll start to see winners and losers, in formats and brands.
There will continue to be an oversupply of Cannabis, which drives the price down. Cannabis is like any other CPG product; good margins come from brand differentiation and product innovation. Consumers can and will be increasingly selective. Effective brand building and marketing (made tougher by the regulations), is essential to attract consumer attention and drive sales. And when the US brand machine really comes online; we’ll have to be at the top of our game to compete.
We’re also seeing major changes Internationally, that could be very positive for Canadian cannabis. The U.N. reclassified cannabis as a less dangerous drug. The EUs highest court ruled that CBD is not a narcotic drug. South of the border, more states are becoming more weed friendly and there is excitement over the possibility of federal legalization. This presents huge opportunities for well positioned Canadian companies. The U.S. market has always been the endgame, and the reason why the LP valuations were so high; they were being valued for what the broader cannabis market offered in the near future.
The U.S. is closer than it has ever been to federally legalizing, but I don’t see it being pushed over the line in the short term. With everything Biden is inheriting and has to deal with — COVID, race relations, the economy teetering on recession, repairing foreign relations — In terms of priority, I think Cannabis legalization is low on the list. Not to mention the fact that Biden has historically been either negative or at least ambivalent about the issue.
What I think is far more likely for the US is more and more states open up independent of the feds. For example, Governor Andrew M. Cuomo announced a proposal to legalize and create a system to oversee and regulate cannabis in New York. We’ll see growing opportunities for Canadian LPS with access to those markets as they come online. As red, blue and purple states build consensus on the issue, eventually it will require zero political capital to get federal legalization done. Will that be this year? I doubt it.
First and foremost, Canadian companies should focus on winning at home — with great products and brands that drive meaningful revenue and margin— whilst looking for targeted opportunities abroad in jurisdictions where they have the most chance of success/have a strategic advantage. There’s plenty of growth still to come in Canada, and there are lots of reasons to be bullish on international expansion. We have an exciting year ahead.
