The Cannabis Market Update – Q2 2022
This issue highlights the challenges posed by COVID-19 and inflation. Ontario increased its retail store count from 1,358 in early January 2022 to 1,503 in early April 2022. Compared to December 2021, January retail sales decreased ~2.1% to C$347.2MM with all provinces except Ontario and Saskatchewan experiencing declines. Vapes, edibles, beverages, and concentrates saw increased sales growth between November 2021 and January 2022. Concentrates experienced the most sales growth (+6.5%) and topicals experiencing the steepest decline (-16.1%) during the same period. Top 10 LP market share declined from 70.9% in December 2021 to 63.2% in January 2022.
Macro Highlights
COVID-19
While many countries have relaxed rules and scaled back testing, COVID-19 remains a huge challenge. If vigilance is not exercised globally, we can expect bumps in hospitalizations and ICU occupancies.
Monetary and Fiscal Policy
To combat inflation without torpedoing economic growth, The Bank of Canada and the US Fed approved 25 bps rate hikes to bring interest rates to 50 bps. Both countries expect about six rate hikes before year-end.1, 2
Cannabis Industry Overview
Legal Market Size
2021 size: C$3.9B (Canada);3 US$24.0B (USA)4
Expected size by 2026: US$6.3B (Canada) and US$46.0B (USA)4
Economic Contribution
Since recreational legalization, the cannabis industry has contributed C$43.5B to Canada’s GDP and has sustained 151,000 jobs across the country.3
Canadian Retail
Compared to December 2021, January 2022 cannabis sales declined 2.1% to C$347.2MM; all provinces except Ontario and Saskatchewan experienced revenue declines.5
Note: sales usually drop in January following boosts in holiday-related sales in December; this trend is not only restricted to cannabis
Since 2018, total cannabis sales totalled ~C$11.1B; the legal recreational market operates at an annual run rate of ~C$4.17B
3,6
Starting February 25, 2022, Alberta Gaming, Liquor & Cannabis began adding a 6% mark-up on the wholesale cannabis price to reflect a market maturity over 3 years old; retailers are responsible for determining their own retail and consumer pricing.
7
In February 2022, the Alcohol and Gaming Commission of Ontario (AGCO) updated rules aimed at preventing material inducements between cannabis retailers and LPs to level the playing field; new guidelines take effect on June 30, 2022.
AGCO also barred retailers from co-branding cannabis or accessories with LPs. However, on March 28, 2022, the body reversed the decision; retailers can contract with LPs to create in-house brands and white-label products
AGCO announced retailers can offer delivery and curbside pickup permanently.
As of April 4, 2022, Ontario had 1,503 open licensed cannabis stores and a footprint per store of 9,948. 16% of the open stores in Ontario are in the Toronto City municipality.
US Cannabis
SAFE Banking Act revived as an amendment to The America COMPETES Act, a domestic spending bill which passed the House in February 2022.
Senator Schumer to introduce the Cannabis Administration and Opportunity Act in the Senate in April 2022, with committee hearings to follow soon after.
Cannabidiol and Marihuana Research Expansion Act unanimously approved in Senate to cut the bureaucracy that stalls research into CBD and cannabis medical properties.
House advanced the Marijuana Opportunity and Expungement (MORE) Act for the second time in history.
International Developments
EMEA: Malta officially legalized cannabis in December 2021 (First in Europe); German coalition government plans to legalize cannabis; Italian Constitutional Court rejected a referendum that would decriminalize cannabis; While CBD is no longer considered a dangerous drug in Israel, it will not be used in food, supplements or cosmetics; South African government to fast-track cannabis industry regulations.
Asia: Thailand approved the decriminalization of cannabis (First in Asia);
Latin America: Colombian government mandated medical insurers must provide coverage for all pharmaceutical forms of cannabis.
Cannabis Products
Market share breakdown of cannabis products in Canada:
Flower: C$165.4MM, 47.5% of total sales, -1.5% from C$167.9MM in November 2021; Organigram led the segment in January 2022
8
Pre-rolled: 22.5% (C$78.4MM), -6.2% from C$83.5MM in November 2021; in January 2022, Tilray led the sector
8
Vapes: 14.5% (C$50.6MM), +2.4% from C$49.4MM in November 2021; Auxly dominated the category in January 2022[8]
Edibles: 5.5% (C$19.1MM), +6.3% from C$17.9MM in November 2021; Indiva topped the sector in January 2022
8
Beverages: 1.9% (C$6.7MM), +0.6% from C$6.67MM in November 2021; in January 2022, Hexo was the category front-runner8
Canadian federal government proposed regulations that would loosen restrictions that limit the number of infused beverages consumers can purchase; this could potentially bolster segment sales
Consumers permitted as many as forty-eight 355ml infused drinks at a time - a sharp increase from the five can maximum allowed previously
Rules do not change the maximum limit of 10 mg of TCH per can
Concentrates gained the most, increasing +6.5% from C$14.9MM in Nov ‘21 to C$15.9MM in January 2022; topicals experienced the steepest decline, decreasing -16.1% from C$1.7MM in November 2021 to C$1.4MM in January 20228
Competitive Landscape
Top 10 LPs had a combined 63.2% market share in Jan ‘22; they represented 70.9% of the market in December 2021.8 Organigram, Auxly, Village Farms, Decibel, Bzam gained market share in January.
420
With COVID-19 restrictions easing globally, consumer shows are poised to return after a long hiatus. Some notable events include: Sweetwater 420 Fest, Niagara Falls 420 Expo, 420 Experience, 420 Networking & Education.
Capital Markets Update
Capital Raises
For the first five weeks of 2022, total North American capital raises were US$766MM (~US$700MM debt; US$66MM equity), down 48% y/y.9
Equity raises were down 79% y/y in the US and down 94% y/y in Canada; Debt raises were up 544% y/y in the US and up 169% y/y in Canada9
M&A / Strategic Alliances
Hexo and Tilray announced proposed agreement to create a strategic alliance:
Tilray will receive ~C$20MM in interest payments in the first year, which will add ~C$0.04 per share to future earnings per share; agreement also provides Tilray with an equity conversion option into Hexo
10
Both companies benefit from production efficiencies and support services savings of up to C$50MM
10
Aurora Cannabis to acquire TerraFarma Inc., Thrive Cannabis’ parent company to expand its recreational portfolio; deal size: C$38MM.
2 cnbc.com/2022/03/16/federal-reserve-meeting.html
5 https://cannabisretailer.ca/2022/cannabis-sales-down-2-in-january/
7 https://stratcann.com/2022/02/24/alberta-to-add-6-markup-to-price-of-wholesale-cannabis/
8 January 2022 Hifyre data
9 https://www.viridianca.com/deal-tracker/cannabis-deal-tracker-week-5-2021
Allen Benjamin
Managing Director and National Lead, Cannabis & Emerging Industries, Commercial Bank, Canada
