Business failures and consolidation failed to stop Canada’s stockpile of unsold cannabis from reaching a new high in the final quarter of 2022, the latest sign that shrinking prices and margins could continue to squeeze companies.
Packaged and unpackaged inventory of dried cannabis jumped to an all-time high of 1.47 billion grams (3.2 million pounds) as of December 2022, according to the latest data from Health Canada, which tracks overall unsold stockpiles of licensed producers, wholesalers and retailers.
That’s an increase from 1.3 billion grams in December 2021.
Federally licensed cultivators were sitting on 1.39 billion grams of packaged and unpackaged inventory as of December 2022, while stores and wholesalers held 80.7 million grams of packaged inventory.
The data suggests the country’s cannabis industry remains gripped by a supply-and-demand imbalance, even though many of the biggest producers have mothballed their largest cultivation facilities.
Last year, for instance, Aurora Cannabis closed its flagship Aurora Sky facility in Edmonton, Alberta – one of the biggest in Canada.
The oversupply situation is thought to be one of the factors forcing down cannabis prices.
The retail price of cannabis has fallen by almost 30% since 2018, when Canada legalized adult-use sales, according to Statistics Canada’s Consumer Price Index.
Other estimates suggest the overall price decline is more severe.
Wholesale prices in the country tumbled more than 40% last year alone, according to the Canadian Cannabis Exchange (CCX), a live trading platform for B2B wholesale marijuana.
Hypercompetition
Falling prices are putting the squeeze on businesses across the cannabis supply chain in Canada.
Fourteen of the 35 Companies’ Creditors Arrangement Act (CCAA) filings in Canada between Jan. 1 and Dec. 22 of last year involved companies operating in the cannabis space.
The filings are equivalent to bankruptcy filings in the United States.
“I don’t think there’s a lack of competition in Canada – I think there’s overcompetition,” said Elad Barak, CEO of Djot, a Toronto-based company selling cannabis dispensers and pod systems for concentrates.
“They’re growing cannabis because that’s what they know how to do. But when they go to sell it, they can’t,” he said.
“You’re seeing two results – some companies are going under, but the cannabis doesn’t disappear. They hold it or sell it” via liquidations of unsold inventory, as companies go bankrupt, he said.
Citing the latest Health Canada figures, Barak noted that there are now nearly 1,000 licensed producers in Canada that are competing in various parts of the federally regulated supply chain.
The number has not stopped growing since legalization in October 2018, despite companies exiting the industry via consolidation and others via the CCAA.
As of last summer, there were 886 licensed cultivators, processors and sellers under Canada’s Cannabis Act.
That figure was approximately 730 in 2021.
In 2020 and 2019, the numbers were 440 and 206, respectively.
Record ‘croptober’
Canadian cultivators produced a record amount of cannabis during last fall’s “croptober” – when most of the outdoor cannabis harvest comes in.
Dried cannabis produced last September, October and November totaled 640 million grams, a year-over-year increase of 14%.
In the same three months of 2021, approximately 560 million grams of dried cannabis was produced.
In all of 2022, roughly 2 billion grams of cannabis was produced, according to Health Canada data.
For perspective, in the same year, approximately 360 million grams of dried flower and pre-rolls were sold at retail in Alberta, British Columbia, Ontario and Saskatchewan, according to Cooper Ashley, analytics manager at Seattle-based cannabis data firm Headset.
Those provinces account for about three-quarters of the Canadian market.
Cultivation area falling
Canada’s licensed growing area is continuing to decline, according to the Health Canada data.
The total area within federally licensed sites where indoor/greenhouse cannabis cultivation activities occurred measured 1,595,724 square meters in December 2022.
That’s almost 30% lower than the all-time high of 2,217,216 square meters reached in May 2020.
Cannabis greenhouse area as a percentage of all greenhouse area – including those used for vegetable cultivation – is also in decline.
At its peak in 2020, cannabis cultivation accounted for a little more than 11% of Canada’s total greenhouse space.
As of today, cannabis accounts for 7.6% of Canada’s total greenhouse and indoor cultivation area – a reduction of more than 30%.
Licensed outdoor cultivation area is declining at a much slower rate.
The area where outdoor cultivation activities occurred in December 2022 measured 595 hectares (1,470 acres).
That’s approximately 16% lower than the all-time high reached in December 2021, when 713 hectares were used for cannabis cultivation.
Businesses cope
Some businesses have adopted strategies to cope with falling prices and soaring inventories.
SNDL, a cannabis producer and retailer based in Alberta, launched a “pop-up” retail brand called Firesale Cannabis.
Pop-up retail outlets are stores which are not intended to be permanent.
In an investor presentation, SNDL called the pop-up strategy a “solution to the sustainability challenges facing the cannabis industry.”
“Our cannabis liquidation pop-ups help licensed producers sell aged inventory at deeply discounted prices, with the aim of providing the most affordable cannabis products in Canada.”
SNDL operated two Firesale stores as of May 12, 2023.
Adam Coates, chief revenue officer of Decibel Cannabis Co. – one of the top cannabis producers in Canada by sales – said falling prices in the discount and value segments puts pressure on the core and premium segments.
“Pricing in those categories is relative, so while there are a lot of discount and value options in dried flower, the more profitable core and premium segments see volume declines when the price difference between those lower price tiers widens,” he told MJBizDaily in a phone interview.
“It has an impact on how we think about our pricing strategy and what’s required to be successful in dried flower.”
Coates said Decibel sells all the cannabis it produces.
He said price is being used as the main driver by some competitors to get market share and volume growth.
“But that strips out all the profitability as well, because excise tax stays the same no matter where your pricing is (when priced below $10 per gram),” he said.
“At some point, that has to stop.”
Matt Lamers can be reached at matt.lamers@mjbizdaily.com.
