Sales of adult-use cannabis in Canada are slowing more quickly than expected, according to a new report, and at least one analyst says structural changes are needed for the nation’s industry to recover growth momentum.
A report, written by Toronto-based analyst Frederico Gomes of ATB Capital Markets, notes that Canadian marijuana retail sales grew an estimated 7.7% year-over-year in September, which would be the lowest since legalization occurred in late 2018.
Decelerating nationwide sales add to a growing list of challenges for Canadian cannabis producers and retailers.
Some of those include:
- Government-owned businesses are generating the only meaningful profits in the industry.
- Those government-owned businesses, mostly wholesalers, are taking an unfair margin, business leaders say.
- The industry continues to suffer from a massive oversupply of cannabis, with nationwide inventories reaching 1.4 billion grams (1,400 metric tons) and cannabis destruction since 2018 approaching another 1 billion grams.
Gomes attributes growth deceleration to:
- Price compression, as less margin flows through to businesses.
- Declining sales volume growth of unique items sold, meaning consumers are buying bigger packages.
Earlier this year, ATB warned that recreational cannabis sales growth rates had been slowing every quarter for the past two years.
“This trend indicates a market that is growing slower – and therefore is smaller – than previously anticipated,” Gomes wrote in the July note.
“While the slowdown can be partially attributed to price compression at the LP and retail levels – so far dodging inflation, here – we believe the long-term trend reflects a maturing market.”
The ATB analyst shaved 200,000 Canadian dollars ($148,000) off his 2022 recreational sales forecast for Canada.
ATB now projects Canadian sales of recreational cannabis to be CA$4.6 billion in 2022.
A positive note
Gomes said there’s a silver lining for licensed cannabis companies.
Early signs suggest pricing might be bottoming out.
“We think that these may be early signs that industry pricing is bottoming out as fragmentation nears its peak, companies are forced to focus on margins – balance sheets are stretched and access to capital is scarce – and marginal gains in cultivation efficiency diminish,” Gomes wrote in the note.
He said flower prices per unit appear to be turning a corner, “which could provide much-needed margin relief for LPs through 2023.”
But Gomes noted sales volume growth decelerated over the past four months in categories such as flower and edibles.
“Since July 2022, flower volume declines have been, for the first time, superseding price per unit declines,” the analyst wrote.
“We believe this trend is reflective of a consumer shift towards bulkier flower purchases, market maturation, and a transition towards pre-rolls.”
Sales volumes and prices per unit of pre-rolls are growing, Gomes said, and the category is slowly gaining on flower.
He noted that pre-rolls now account for almost one-third of the market. Last year, those products made up a quarter of all sales.
Structural changes needed
Pablo Zuanic, managing director at New York-based investment banking firm Cantor Fitzgerald, said growth of the Canadian adult-use market continues to decelerate.
In a note to investors, Zuanic said that even though Canada’s 13% year-over-year growth in the third quarter is better than the flat trends in U.S. state markets, Canadian per-capita sales significantly lag behind key states.
Zuanic noted that Canada’s per-capita sales were $90, compared with $120 in California, $150 in Michigan and upwards of $200 in Arizona and Massachusetts.
“We think structural changes are needed for the (Canadian) market to recover the growth momentum,” he wrote.
One such reform could be to the country’s excise tax structure. About two-thirds of Canada’s cannabis producers are falling behind on tax payments.
Zuanic also wrote that “prices continue to decline, but less than in the past and we see signs of stabilization; also, we note companies gaining share tend to enjoy higher average prices.”
“We attribute this to a more discerning consumer and to companies realizing the race to the bottom is not sustainable,” he added.
Zuanic noted that flower’s share of the overall market fell to 40% in the third quarter of 2022 from 49% in the same period last year.
Pre-rolls accounted for 31% of sales in the quarter, up 16% from a year ago.
The growth in infused pre-roll sales represents “the most significant growth of any segment within the cannabis industry over the last year or two, given that it is growing very quickly and it is also very large,” Cooper Ashley, analytics manager with Seattle-based cannabis analytics firm Headset, previously told MJBizDaily.
Matt Lamers can be reached at firstname.lastname@example.org.