Cannabis Market Update - Q3 2022
In this Issue, we note that the challenges posed by COVID-19 and inflation persist. Despite concerns about saturation in large cities like Toronto and Hamilton, Ontario continues to increase its retail store count compared to the other provinces. April retail sales increased ~3.8% to reach a record $372.4MM across Canada. All cannabis product categories saw increased growth between February 2022 and April 2022, with cultivation (seed sales) experiencing the most sales growth (+212.0%) and flower experiencing the least growth (+4.6%). Top 10 LP market share continued to decline as smaller players gain ground.
Macro Highlights
COVID-19
COVID-19 remains a huge challenge. While deaths are at low levels, hospitalizations and wastewater data in early July slowly ticked upwards, pointing to a growing wave of infections.
Monetary and Fiscal Policy
Inflation continues to rise, driven by higher energy and food prices. To stem this, The Bank of Canada and the US Fed approved 75 bps rate hikes to 1.5% and 1.75%, respectively.1
Cannabis Industry Overview
Canadian Retail
Compared to March 2022, April 2022 cannabis sales increased ~3.8% m/m to C$372.4MM; all provinces except British Columbia experienced revenue increases.2
The dip in British Columbia followed a 21.27% m/m growth in March.
In May 2022, the Ontario Cannabis Store (OCS) confirmed that confidential store sales data was leaked to the public and notified the Ontario Provincial Police.
The Yukon Government announced that private retailers will be allowed to sell cannabis online starting May 2022. This follows a similar move in Alberta that went into effect in March 2022.
An EY Parthenon report notes that in Ontario, aggregate retail, government taxes, and provincial mark-ups represent 72.9% (26.3% - retail, 27.8% - taxes, 18.8% - OCS) of cannabis product selling prices. LPs capture only 27.1% of the selling price.3
To truly eliminate the illegal market, the report recommends single harmonized federal excise stamps, the reduction of federal and provincial excise duty rates, the reduction of regulatory fees, a potential increase in edibles potency limits, less restrictive marketing regulations and packaging requirements as well as increased enforcement against the black market.
Three hundred SQDC employees are currently on strike across 20-plus stores in Quebec after the SQDC suspended the Canadian Union of Public Employees leadership and 75 staff members over dress-code violations.4
As of July 4, 2022, Ontario had 1,617 open licensed cannabis stores and a footprint per store of 9,281. 15% of the open stores in Ontario are in the Toronto City municipality.
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US Cannabis
Senator Schumer and Rep. Dave Joyce, a pro-legalization GOP congressman, held talks about interim, bipartisan cannabis reform steps that can be taken as he continues to finalize a comprehensive legalization bill (Schumer’s bill was not introduced in April as scheduled).
Reps. Blumenauer (D-OR) and Mast (R-FL) refiled bill to expand medical marijuana access for military veterans in late June 2022.
The Senate Intelligence Committee passed a provision that would prevent national security agencies from disqualifying applicants based on past cannabis use.
Rep. Perlmutter continues to push for marijuana banking reform; this time, he filed the SAFE Banking Act as an amendment to the National Defense Authorization Act.
International Developments
As countries across the globe continue to legalize medical cannabis, the global medical cannabis market, which stood at US$8B in 2018, is expected to grow at a CAGR of 26.6% up to US$52.8B by 2027.5
EMEA: ~55% of Europeans support adult use cannabis legalization6; Greek government expects the production and sale of medical cannabis in pharmacies would add up to US$1.67B annually; Swiss authorities approved the launch of a pilot recreational cannabis sale program, with ~400 people in Basel allowed to buy cannabis from select pharmacies; UK retailers removed some edible CBD products from shelves as compliance concerns mounted following the food regulator’s decision to rein in the industry; Germany to start legal process for cannabis soon; London Mayor set up group to look into decriminalization of cannabis; Ukrainian government may legalize medical cannabis amid war with Russia; subcommittee in Spain’s Congress of Deputies approved a draft bill to allow medical cannabis sales in the country; Israel’s pro-cannabis party - Green Leaf Party - will run in the country’s upcoming elections;
Asia-Pacific: Thai police now unable to arrest anyone in possession of cannabis following its removal from category 5 narcotics list; A Japanese Ministry of Health, Labor, and Welfare panel began discussions regarding lifting the ban on medical cannabis; Research shows medicinal cannabis boom in Australia as the country approved more than 248,000 medical cannabis prescriptions over the past 5 years, 85% of these have been given out since January 2020; and
Latin America: Argentina now considers medical cannabis reform a national priority and is preparing to legalize it at the federal level; The Sixth Panel of Brazil’s Superior Court of Justice authorized three patients to grow cannabis for medical treatment, decision is likely to be applied nationwide in similar cases.
Cannabis Products
Sales growth breakdown of cannabis products in Canada (April 2022):
Flower: C$162.7MM, 43.7% of total sales, +4.6% from C$155.5MM in February 2022; Organigram led the segment in April 2022.7
Pre-rolled: 25.9% (C$96.6MM), +20.4% from C$80.2MM in February 2022; in April 2022, Hexo led the sector.7
Vapes: 14.4% (C$53.5MM), +7.7% from C$49.7MM in February 2022; Auxly dominated the category in April 2022.7
Edibles: 5.8% (C$21.7MM), +13.0% from C$19.2MM in February 2022; Indiva topped the sector in April 2022.7
Beverages: 2.1% (C$7.7MM), +16.7% from C$6.6MM in February 2022; in April 2022, Hexo was the category front-runner.7
Cultivation (seed sales) gained the most, increasing +212.0% from C$0.15MM in February 2022 to C$0.49MM in April 2022; flower experienced the least growth, increasing +4.6% from C$155.5MM in February 2022.7
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Competitive Landscape
Top 10 LPs had a combined 58.3% market share in April 2022; they represented 61.1% of the market in February 2022.7 Hexo, Canopy Growth, Cronos, Decibel, Bzam, and The Valens Company gained market share in between February and April 2022.
Capital Markets Update
Capital Raises
Cannabis capital raises are down 64.1% YTD. Overall, equity raises are down 76.1% y/y, with a more significant 81.6% decline in Canadian equity financing. Total debt raises constitute 53.9% of total capital raised so far - its highest in history for comparable periods.8
M&A
Sundial closed its acquisition of Alcanna Inc., one of the largest North American alcohol private-sector retailers:
Transaction gives Sundial a 63% equity interest in Nova Cannabis, one of Canada’s largest value-priced retailers with 78 retail locations across AB, SK, and ON. Sundial now operates across three segments: Cannabis Operations, Cannabis Retail (which now includes liquor retail), and Investment Operations; deal size: C$320MM.9
Canopy Growth Corporation continues its expansion into the US by signing a deal to acquire Jetty Extracts, a leading California brand; deal size: C$69MM.
In late June 2022, Sundial announced it entered into a bid agreement to potentially acquire Zenabis Global Inc.’s assets including its shares. Of particular interest to it is Zenabis’ 380,000ft2 EU GMP certified growing facility NB as it could allow Sundial to export products to the EU and the UK.
In early July, High Tide Inc. signed a deal to buy 9 stores from Choom Holdings Inc. (2 in BC, 6 in AB, and 1 in ON). Upon close, the acquirer would have 136 stores; deal size: C$5.1MM.
1 https://www.cbc.ca/news/business/us-rate-hike-1.6489696
4 https://cannabisretailer.ca/2022/aprils-retail-sales-continue-to-climb/
5 https://cannabisretailer.ca/2022/46-of-price-is-taxes-mark-ups/
8 April 2022 Hifyre data
10 https://www.investorideas.com/news/2022/cannabis/04064DealTracker.asp
Allen Benjamin
Managing Director and National Lead, Cannabis & Emerging Industries, Commercial Bank, Canada
