Missed earnings, misdirection put Canadian cannabis executives in hot seat

The exodus of cannabis executives in Canada is in full swing after their companies raked up collective net losses exceeding CA$6 billion ($4.4 billion) in 2019, the first calendar year recreational products were allowed to be sold.

Most of Canada’s top cannabis producers have replaced their chief executives or chief financial officers over the past year after failing to meet customer and investor expectations.

Some left on their own volition, and others were forced out.

Loss leaders with new corporate leadership include the following companies, with the former chief executive in parentheses: Canopy Growth (Bruce Linton), Aurora Cannabis (Terry Booth) and Sundial Growers (Torsten Kuenzlen).

What went wrong?

Experts say the CEOs spent too much money on greenhouses, were too focused on investors and did not pay enough attention to customers, real markets or quality control.

Many simply lacked the professional toolkit necessary to steer a cannabis company in these turbulent years and ended up chasing too many opportunities in far-flung areas of the world where actual marijuana markets remain years away.

“The industry is calling for a different skill set. We’re moving towards now seeing CEOs that focus on profitability as opposed to other metrics,” said Deepak Anand, CEO of London-based cannabis company Materia Ventures.

“The landscape from a capital-raise perspective has shifted tremendously, and that’s what’s dictated some of these changes.”

Times have changed 

In 2017 and 2018, cannabis companies were valued by investors based on the number of facilities they could “fund” as quickly as possible.

“That was the holy grail from a capital-markets perspective,” Anand said.

That quickly changed to how quickly a business could be scaled, which evolved into a focus on profitability.

The rapid industry evolution left some executives with outdated strategies in a matter of months.

“There’s over 300 license holders currently, and the question now is what your profitability looks like,” Anand said.

“That takes a whole other skill set, and it’s nothing against the original CEOs and founders because, in hindsight, they did their jobs.”

Other executive shake-ups include:

  • Harvest One (replacing CEO Grant Froese) in late March.
  • Supreme Cannabis Company (replacing CEO Navdeep Dhaliwal) in January.
  • Auxly Cannabis Group (replacing CEO Chuck Rifici, though he remains board chair) last summer.
  • Aphria (replacing CEO Vic Neufeld) in early 2019.

Some producers with new CFOs in that time include Canopy GrowthCronos GroupHexo Corp. and Tilray.

Wrong fit, wrong approach

Some of the founders of today’s large cannabis companies were good at raising money but not good at making money.

Executives who failed to adapt fast exposed their companies to massive losses, as they continued to push strategies made for 2017 that were not applicable to the new reality in 2019.

“They lack the experience in defining a value-proposition target and the value proposition that will delight them,” said Rob McPherson, a corporate adviser and former Bacardi Canada president.

“Yes, it is regulated, but the foundations and fundamentals of good business and good CPG still apply.”

He said most companies did not have the right senior executives in place.

“As a new and risky and still-stigmatized industry, cannabis was not going to get the best and brightest – they have jobs and options for jobs in more established industries. They grew up in disciplined and focused companies and don’t want or need the chaos of a startup.

“They have a reputation.”

In other words, some key founders didn’t have the right stuff to grow their companies after planting the seed, and neither did the consumer packaged goods executives who replaced them.

For example, Alberta cannabis producer Sundial Growers brought in Kuenzlen to much fanfare in 2018.

But the former Coca-Cola Co. and Molson Coors executive departed the cannabis company before it turned a profit.

M&A ‘made no sense’

One prominent CEO, granted anonymity to speak freely, said executives are departing for a number of reasons, but the underlying problem is their business models are failing and they burned significant capital on poorly researched acquisitions.

“The reason this is happening is these companies are going bankrupt. They don’t have a business (to speak of), and they can’t raise capital,” the executive said.

In particular, companies engaged in a spending spree on acquisitions at the height of the cannabis bubble.

“These companies spent money on things that made no sense, and now they’re paying for it,” the CEO said.

Alberta-based Aurora Cannabis, for example, spent roughly 4.5 billion Canadian dollars ($3.2 billion) on a spree of corporate purchases worldwide from 2017 to 2019.

The company was worth about CA$1.5 billion – less than one-third the cost of those acquisitions – when it replaced its founding CEO and other key executives in recent months and backpedaled on major projects in Canada and Europe.

Aurora reported a net loss of CA$1.3 billion in its most recent quarterly report.

“The reason we got here is we had a bubble, the bubble burst, then it exposed the vulnerable – those with no cash or with businesses that don’t make any sense,” the CEO said.

“Some of this is driven by the people knowing that their shareholders are on the Titanic and they’re jumping ship. Some of it is boards believing they need a new face. Publicly, they say ‘ideal time for a change in leadership,’ but behind the scenes, the board is saying this person is not getting the job done or has mismanaged the business and we need to make a change.”

Stocks over customers

Perhaps the biggest mistake made in Canada’s cannabis boardrooms from 2017 through early 2019 was a laser focus on investors at the expense of specific customers and market segments.

As far back as 2017, Canadian marijuana producers had bankrolled more than enough canopy to meet demand for the recreational market.

But they kept building, buying and spending.

Canadian marijuana companies spent billions of dollars building greenhouses and even buying companies that owned greenhouses.

The mania that took hold of boardrooms became so fierce that Canadian businesses financed, built and licensed 1.4 million square meters of greenhouse/indoor space, making cannabis the fourth-largest greenhouse crop in Canada, behind only cucumbers, peppers and tomatoes.

Why the overemphasis on spending and building?

Cannabis industry veteran and former CEO Jeanette VanderMarel said the emphasis was “pretty much solely about what is going to bump stock price.”

She said the focus on capacity expansion came without an assessment of the market.

“Even in the early days, you could see what it was really all about once public markets got interested in cannabis. There was very little concern of actual quality, products, output. It was press releases to impress the market,” VanderMarel said.

“As a company, your job is to create a good product and sell it to a consumer. But that wasn’t what the industry was built around. It was built around stock promotion.”

She said she never supported greenhouse cultivation. High-quality cannabis should be grown indoors and the rest should be grown outdoors, she said.

VanderMarel said companies that survive are going to change their focus from stock promotion and capital raises to operational efficiencies, brand development and consumer loyalty.

“We’re growing up,” she said, “and we need to have real business leaders and move beyond the entrepreneurs.”

Matt Lamers is Marijuana Business Daily’s international editor, based near Toronto. He can be reached at [email protected].

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