Canada’s cannabis industry burning out 5 years after legalization – National | Globalnews.ca
[ad_1]
When Abi Roach thinks about the 20 years she spent fighting for Canada to legalize cannabis, she says pot legislation is like a clenched fist.
The analogy, which Roach first heard from a former Toronto councillor, represents the tight grip on the cannabis market that legislators held for centuries. It meant Roach had to exploit a grey area of the law to run her popular cannabis consumption space HotBox, which opened in 2000, and its customers were accustomed to looking over their shoulders for cops before walking through the door.
Roach has been a stalwart in Canada’s cannabis industry as a longtime advocate for legalization and queen of an empire that eventually spanned 15 different businesses, including a magazine, a tour company and lines of pot accessories and apparel.
While regulations and attitudes have loosened since Canada legalized recreational cannabis five years ago, Roach said policy constraints and industry response mean there is still “a ton of room to go” before the industry reaches general acceptance.
“It’s the closed fist that slowly opens as we prove ourselves to society as being just a normal part of everyday life,” she said, as the fifth anniversary of cannabis legalization approaches on Oct. 17. “The world isn’t exploding, the chickens aren’t going to fall from the sky, if people are consuming cannabis.
“Five years into it, you’re really seeing that cannabis is an industry that is viable.”
The signs of that viability are everywhere. Cannabis shops dot some of the most coveted strips in Canadian real estate. Alberta- and Ontario-based giants have expanded their medical pot businesses into Europe. The domestic recreational market is valued in the billions.
Cannabis legalization has had wide-reaching effects and made its use more accessible and acceptable.
Yet the razzle-dazzle days where money was no object and sky-high demand was expected are gone, replaced by a sobering reality: legalization has fallen well short of expectations.
The biggest companies – Canopy Growth Corp., Aurora Cannabis Inc. and Tilray Brands Inc. – have shrunk their footprints, laid off thousands and grappled with balance sheets that reflect a turbulent market and a longer march to profitability than many once imagined.
Others weren’t so lucky. They sold their business at bargain prices to a bigger rival, folded or declared bankruptcy.
And Roach worries the carnage isn’t over.
“Until there’s a real regulatory reform in all of the main pain points of the industry, we’re going to continue to see companies go bankrupt … and a lot of consolidation in the market,” Roach predicted.
“It’s becoming much harder and harder, not only to raise capital to get out of trouble, but also to sell your company. I know people that were trying to sell their cannabis stores. Nobody wanted it.”
Many cannabis businesses were doomed from the start. They spent fast and furiously in anticipation of legalization, scrambled to produce the right amount of pot _ first there was not enough, then too much – and discovered catering to consumers wasn’t easy.
Canadians wanted more potent products in packaging that wasn’t dull. Others couldn’t shake relationships with longtime dispensaries and dealers who could supply pot at a fraction of the price of the legal market.
Cannabis companies wanted governments and police to go after illicit sellers more aggressively, but felt authorities never put their full might behind the cause, so pot producers took an “If you can’t beat them, join them” approach.
“The only way to convince an illicit market consumer to migrate into the regulated market is to have a comparably priced product,” said Vivien Azer, a managing director and senior research analyst at TD Cowen who specializes in the cannabis sector.
Hexo Corp. paved the way, she said, when it launched 28-gram packages of Original Stash dried cannabis flower in 2019 (Hexo was acquired by Tilray in April). It sold for $140, or roughly $5 per gram in Ontario, and slightly less in Quebec. Then-chief executive Sebastien St-Louis marketed it as disrupting the black market.
“Everyone else followed, and so you saw this massive price deflation in the legal cannabis market,” Azer said.
In November 2021, a report from Deloitte Canada and cannabis research firms Hifyre and BDSA said the average price for dried cannabis was $7.50, down from $11.78 per gram at the start of 2019.
By last month, most of the dried flower products selling in the Ontario Cannabis Store were priced around $3.50 per gram, with a few more selling for around $5 or $6 per gram.
“With that price deflation, you could kiss profit aspirations goodbye,” Azer said.
The excise taxes the federal government and provinces charge to licensed producers only made matters worse.
For dried and fresh cannabis, plants and seeds, the taxes amount to the higher of $1 per gram or a 10-per-cent per gram fee.
For edibles, extracts and topicals, the duty is set at one cent per milligram of tetrahydrocannabinol, cannabis’ active ingredient, in the product.
While these rates were palatable at the time of legalization, when people predicted cannabis would sell for $10 per gram and taxes would thus be low, pot companies are now almost universally railing against the rates.
A May 2022 analysis from the Cannabis Council of Canada found a package with 28 grams of flower selling with HST for $124.78 would carry excise duties of $29.13, or 23 per cent of the purchase price.
Roach realized the tax “is absolutely unrealistic,” after she sold her beloved HotBox to the Friendly Stranger pot firm in 2020. It later turned the business over to Fire & Flower Holdings Corp., which has since filed for creditor protection.
Following a stint at the Ontario Cannabis Store, Roach became a head of product marketing at St. Thomas, Ont., business Mera Cannabis Corp., where staff recently calculated manufacturing costs for a 14-gram flower product were $15, but taxes amounted to $16.50.
And many of those are going unpaid. Roughly $200 million in excise taxes are outstanding from the cannabis sector, Canada Revenue Agency spokesperson Nina Ioussoupova said in an email.
Until the regulations are reformed, Roach maintains there’s going to be a “continued mess” in the industry while the illicit market maintains its strength.
“We’ve been through a lot and I did 20 years fighting for legalization, but I always say I didn’t fight for legalization to purchase cannabis in the unregulated market,” Roach said.
“My dream … maybe not in the next five years, but in the next decade, is that we can continue to move people from the unregulated market into the legal market to a point where the legal market is the only market.”
Cannabis producers want the same thing.
The morning of legalization five years ago, a share in Canopy traded for about $68 and Aurora opened at $195. Their average stock prices over the past three months have been below $1.
As they watched valuations dwindle, companies argued that the widespread presence of unlicensed dispensaries and other underground sellers was still a problem. To this day, Health Canada estimates they have a hold over 40 per cent of the market.
“The illicit market is why the legal industry isn’t as healthy as everybody would like to see it,” said David Klein, Canopy’s chief executive.
“It probably is the single biggest challenge because if the illicit market would have gone away, as people predicted, you wouldn’t have seen the dramatic shutdown of facilities and layoff of employees,” he said.
“Those sales would have been available for the legal players.”
Thousands of cannabis workers have received pink slips over the last five years and many of the greenhouses and offices where they worked are in the hands of new owners.
Canopy has sold seven properties, including the iconic Smiths Falls, Ont., factory it bought from chocolate giant Hershey’s, since April alone.
“It’s been a volatile five years for sure,” Klein acknowledged, saying up until nine months ago Canopy was still hoping to get more overall market growth out of the industry.
Since then, Canopy realized “the concept that you needed to be everywhere and you needed to be everything for everyone was flawed,” he said.
It sold its Tokyo Smoke retail business to the owners of the Edmonton Oilers hockey team, rethought how many facilities it needed and took a more realistic approach to the possibility of the U.S. legalizing cannabis on a national level – a development pot executives have long sold to investors as their ticket to profitability but has yet to happen.
“We decided the right size is the size we are today, so we don’t have to rely on incremental growth” Klein said.
“Let’s make sure that business can be profitable, and then once we build that really solid foundation, which we now have, then we can look at opportunities to grow.”
[ad_2]
