How Auxly Cannabis beat ‘bigger’ Canadian rivals in 2021: Q&A with CEO Hugo Alves

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Auxly Cannabis | CEO Hugo Alves, How Auxly Cannabis beat ‘bigger’ Canadian rivals in 2021: Q&A with CEO Hugo Alves

Auxly Cannabis gained more of Canada’s recreational marijuana market than any of its competitors in 2021, and the Toronto-based licensed producer has its sights set on even more.

The company more than doubled its share of Canada’s record cannabis sales this year, while competitors such as Smiths Falls-headquartered Canopy Growth and New York-based Tilray struggled mightily.

“We think we can be No. 1 organically,” Hugo Alves, CEO of Auxly Cannabis, told MJBizDaily.

“We spent three years acquiring and building assets and capabilities that we think we need to execute on our strategy. And then we focus on making those capabilities stronger, improving them.

“At the end of 2025, we want to be the No. 1 licensed producer in Canada. We want to have the strongest brands.”

Shares of Auxly Cannabis Group are traded on the Toronto Stock Exchange as XLY.

MJBizDaily spoke with Alves about a range of issues facing the industry, including profitability, mergers and acquisitions as well as why he believes it’s more important than ever to control its own cultivation.

Auxly is handily beating rivals who have spent heavily trying to compete. What are you doing differently?

It boils down to focus: being focused on your consumer, and driving your entire organization to shared strategic goals.

Strategy isn’t just about what you’re going to do. It’s just as much about what you’re not going to do – resisting the temptation to get sidetracked with other opportunities, in other jurisdictions, other formats.

When will Auxly be consistently profitable?

We have two things we focus on across the entire organization. Consumers and (being) sustainably profitable and financially independent.

That is our goal for 2022. It’s not just reaching adjusted EBITDA positive but also for cash flow. So our destiny is truly in our own hands.

Most cannabis mass-producers haven’t been successful. Given your relative success in production, why risk getting into mass-cultivation via your 100% ownership of Sunens Farms

It’s currently growing the No. 1 flower in Ontario, so it’s not as if we’re buying an asset that’s unproven.

We’re going to be successful at Sunens because it’s a project that’s been three years in the making. We helped design and construct the facility. It’s a proven capability.

It gives us a competitive advantage of scale.

Our view of the current market is that companies that have to rely on the competencies of others for core aspects of their business are at significantly greater financial and strategic risk, and that very much applies to cultivation.

We asked ourselves, “What surety of supply or genetic preference or exclusivity are we going to get (if) our contract grower is also our brand competitor in the market?”

So we think that owning your own large-scale cultivation facility is a necessary capability for any company with significant 1.0 (flower) aspirations.

Owning Sunens allows us to stay hyperfocused on our consumer.

We can dedicate our entire genetic library to our branded products.

We can respond to changing consumer preferences based on their preferences, as opposed to what (contract growers happen) to be growing.

The rightsizing of cultivation capacity that’s been happening in the market over the past two years is starting to impact the wholesale flower market, both in terms of availability and pricing.

Before we acquired Sunens, we had been very active purchasing flower in the open market.

In our experience, large volumes of quality flower are increasingly hard to find, and the wholesale price for quality flower is going up.

That narrative – that volumes of supply in producer vaults are a sign of oversupply in a stagnant market – does not tell the whole story. Because the product accumulating in those vaults is never going to be sold.

It’s unsellable. It simply does not meet consumer expectations.

What’s your response to critics who say it’s unethical for cannabis producers, including Auxly, to partner with tobacco companies such as Imperial Brands?

I’m not qualified to speak to the ethics of tobacco.

They sell a legal, regulated product that, from a regulatory perspective, is very similar to the way that Canada regulates cannabis.

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Stay ahead of the curve and avoid costly missteps in the rapidly evolving cannabis industry.

And we sell a product that – up until very recently, we shouldn’t forget – had its own moral stigma attached to it.

We really focus on how Imperial can help us, what we can learn from them, what mistakes we can avoid and how we can get better at executing our strategy.

From that perspective, they’re a wonderful partner. It’s a centuries-old business, hugely successful, and their business is very much focused on a consumer as well.

You’re one of the longest-serving CEOs of a big cannabis business in Canada. What has surprised you?

The rate of social acceptance and the conversion of social attitudes has been incredible. Five years ago (the industry) was very medical.

Today, you see the proliferation of dispensaries, you see the proliferation and innovation of products. You see broader social acceptance.

2021 was the first time legal sales surpassed the illicit market. When we started in 2019, it was a 70-30 split.

Is it a surprise to you that some large businesses with high expectations went so sideways?

I don’t really spend a lot of time focusing on what other businesses do, other than we spend a fair bit of time trying to understand their strategy so we can best consider competitor reaction to our own plans.

This is a nascent industry. There is no playbook.

A lot of money entered the market in a really short period of time, and it led to some decisions that seemed like sound decisions at the time, especially when you think about where valuations were relative to now.

Is excise tax reform needed as part of Canada’s upcoming review of the federal Cannabis Act?

I think excise tax reform is needed.

It’s something that the federal and provincial governments are going to have to look at to ensure a healthy industry.

We know that (a review of the Cannabis Act) is coming.

I think it’s a good time for the government to take stock of how the industry has developed in actuality, what type of industry they’re trying to create to further their policy objectives, and then adjust as necessary.

I do think taxation is an area they should take a hard look at.

Cannabis was supposed to be the kind of industry that leant itself naturally to environmental, social, and corporate governance (ESG) initiatives, but that hasn’t really happened. Why?

Auxly believes making a positive impact is important.

We have embraced sustainability at a brand level, (such as) vape recycling program, 100% biodegradable packaging from vape products.

When you ask “is it a bust?” or “has it met expectations?” or “is it just getting started?” – I think it’s just getting started.

ESG works best when it has two characteristics:

One, it’s purposeful. It’s structured to match and advance your corporate strategic goals, as opposed to just a hodgepodge of good deeds trying to score points on an ESG scorecard.

The second thing is it has to be sustainable, which, in our view, means the underlying business needs to be sustainable.

So we want our ESG initiatives to be meaningful and measurable.

You have to give these businesses (in Canada’s cannabis industry) time to become sustainable before you can expect sustainable ESG action.

This interview was edited for length and clarity.

Matt Lamers can be reached at mattl@mjbizdaily.com.