Canada’s recreational marijuana sales could reach 4.8 billion Canadian dollars ($3.8 billion) this year, which would be 19% more than 2021’s estimated figure, a new report from ATB Capital Markets anticipates.
The estimate is slightly lower than ATB’s previous forecast for 2022 of CA$4.9 billion.
The report, written by analyst Frederico Gomes, estimates a recreational cannabis market compound annual growth rate (CAGR) of about 13.4% between 2021 and 2030, when sales could be as high as CA$12.3 billion.
Despite industry headwinds, ATB said its thesis remains that the market still presents a compelling long-term growth opportunity for select licensed producers and retailers.
“While the industry continues to struggle due to fragmentation and price competition, we believe that players with a lean cost structure, a robust capital position, and operational efficiency can successfully navigate this environment,” the report notes.
It adds that an industry CAGR of more than 13% is attractive, especially for companies that can gain market share.
Crashing market shares for certain companies at least partly contributed to analysts shaving hundreds of millions of dollars off sales estimates for some of the biggest licensed producers in Canada, namely Canopy Growth, Tilray and Aurora Cannabis.
Mostly smaller companies have gained at their expanse, stemming largely from their focus and continued execution.
The ATB thesis “is that the Canadian market offers a large upside to the valuations of mid- and small-caps that execute well.”
Despite store saturation and pricing competition, the report said larger chains, such as High Tide and Fire & Flower, will benefit as independently owned stores exit the market and consolidation occurs.
In a previous report, ATB suggested three factors had contributed to struggles by licensed producers’ to attain profitability.
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- Industry fragmentation, as hundreds of LPs have flooded the market.
- Incipient brand equity stemming from marketing restrictions.
- Unrealized scale advantages.
The report also noted that merger-and-acquisition activity so far has failed to spur consolidation in Canada.
“M&A alone has failed to drive consolidation because market share is volatile and integration is a distraction to an acquirer’s operations,” Gomes wrote, noting that he expects it will take at least two years for the industry to see meaningful consolidation.
He said consolidation will happen gradually via a combination of attrition, consistent execution from a handful of producers as well as mergers and acquisitions.