Chart: What cannabis companies can learn from Canopy’s capacity cuts

Ontario, Canada-based cannabis producer Canopy Growth’s announced production cuts could help ease the nation’s oversupply issues as well as offer lessons for other operators on how to compete in a newer market.

The company is closing two greenhouses in British Columbia, which will result in 500 job losses.

As a result, Canada’s total licensed indoor grow space also will decrease roughly 7%.

As far back as 2017, Canada licensed more than enough capacity to meet projected recreational demand, but companies such as Canopy continued to expand.

Shareholders are now demanding returns on their investments beyond just promises, and that requires a shift in strategy for companies that haven’t been turning profits.

“Canopy’s capacity cut represents some newfound discipline in an oversupplied market that is growing more slowly than expected,” said Mike Regan, an analyst with Marijuana Business Daily’s Investor Intelligence.

“New CEO David Klein and his team have brought fresh eyes to the Canadian cannabis business and decided to eliminate more than half their indoor capacity and nearly a third of their total growing area, while significantly increasing lower-cost outdoor production – the exact opposite of what much of the industry has done for the past few years.”

By shifting focus to outdoor growing, Canopy still dominates Canadian supply (it holds 27% of the licensed outdoor grow space) while reducing overall costs.

Decreasing the cannabis glut in the overall market should also help to boost prices, though the announced production cuts won’t be enough to fully offset Canada’s oversupply issue.

Other key takeaways for cannabis businesses:

  • Always try to reduce cost per gram in production, regardless of how or what you grow. This will position your company to be more competitive for the long term. If you can generate your own cash from existing operations, you don’t need to worry about raising money from investors.
  • Focus on your core competency – and do that well. If you’re a low-cost, high-quality producer, consider wholesaling; if you’re better at distribution and branding, consider buying wholesale. While nascent markets lend themselves to vertical integration, mature markets typically do not.
  • The land-grab approach to growth has an expiration date – and it’s rapidly approaching for most markets. U.S. markets might be on a different legalization timeline, but investors are taking cues from Canada.
Read more about Canopy’s production cuts and the impact on Canada’s cannabis market on our premium subscription service, Investor Intelligence.
Jenel Stelton-Holtmeier can be reached at [email protected]
3 comments on “Chart: What cannabis companies can learn from Canopy’s capacity cuts
  1. Martin Mullany on

    Canopy did not say they were cutting their production capacity. They have said they are closing expensive indoor operations but they are looking to grow outdoors instead as it is a much more competitive way to grow product. That is a different message that should send all those companies with expensive indoor operations into panic mode. Aleafia have produced outdoor cannabis at 8 cents a gram. Most indoor operations are in the $1-$1.50 range.

    Reply
  2. Robert on

    I was shocked to see how many laid off Canopy employees were not Canadian, but had been brought in from other countries. I find it hard to believe that they cannot find Canadians who would want to work in the cannabis industry.

    Reply
  3. Oliver warders on

    This may create new ways to automate, thats concerning but can reshape how the industry works from the inside of it.

    Reply

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