Business
Canadian adult-use cannabis sales growth slowing faster than expected
Sales of adult-use cannabis in Canada are slowing more quickly than expected, according to a new report, and at least one analyst says structural changes are needed for the nation’s industry to recover growth momentum.
A report, written by Toronto-based analyst Frederico Gomes of ATB Capital Markets, notes that Canadian marijuana retail sales grew an estimated 7.7% year-over-year in September, which would be the lowest since legalization occurred in late 2018.
Decelerating nationwide sales add to a growing list of challenges for Canadian cannabis producers and retailers.
Some of those include:
- Government-owned businesses are generating the only meaningful profits in the industry.
- Those government-owned businesses, mostly wholesalers, are taking an unfair margin, business leaders say.
- The industry continues to suffer from a massive oversupply of cannabis, with nationwide inventories reaching 1.4 billion grams (1,400 metric tons) and cannabis destruction since 2018 approaching another 1 billion grams.
Gomes attributes growth deceleration to:
- Price compression, as less margin flows through to businesses.
- Declining sales volume growth of unique items sold, meaning consumers are buying bigger packages.
Earlier this year, ATB warned that recreational cannabis sales growth rates had been slowing every quarter for the past two years.
“This trend indicates a market that is growing slower – and therefore is smaller – than previously anticipated,” Gomes wrote in the July note.
“While the slowdown can be partially attributed to price compression at the LP and retail levels – so far dodging inflation, here – we believe the long-term trend reflects a maturing market.”
The ATB analyst shaved 200,000 Canadian dollars ($148,000) off his 2022 recreational sales forecast for Canada.
ATB now projects Canadian sales of recreational cannabis to be CA$4.6 billion in 2022.
A positive note
Gomes said there’s a silver lining for licensed cannabis companies.
Early signs suggest pricing might be bottoming out.
“We think that these may be early signs that industry pricing is bottoming out as fragmentation nears its peak, companies are forced to focus on margins – balance sheets are stretched and access to capital is scarce – and marginal gains in cultivation efficiency diminish,” Gomes wrote in the note.
He said flower prices per unit appear to be turning a corner, “which could provide much-needed margin relief for LPs through 2023.”
But Gomes noted sales volume growth decelerated over the past four months in categories such as flower and edibles.
“Since July 2022, flower volume declines have been, for the first time, superseding price per unit declines,” the analyst wrote.
“We believe this trend is reflective of a consumer shift towards bulkier flower purchases, market maturation, and a transition towards pre-rolls.”
Sales volumes and prices per unit of pre-rolls are growing, Gomes said, and the category is slowly gaining on flower.
He noted that pre-rolls now account for almost one-third of the market. Last year, those products made up a quarter of all sales.
Structural changes needed
Pablo Zuanic, managing director at New York-based investment banking firm Cantor Fitzgerald, said growth of the Canadian adult-use market continues to decelerate.
In a note to investors, Zuanic said that even though Canada’s 13% year-over-year growth in the third quarter is better than the flat trends in U.S. state markets, Canadian per-capita sales significantly lag behind key states.
Zuanic noted that Canada’s per-capita sales were $90, compared with $120 in California, $150 in Michigan and upwards of $200 in Arizona and Massachusetts.
“We think structural changes are needed for the (Canadian) market to recover the growth momentum,” he wrote.
One such reform could be to the country’s excise tax structure. About two-thirds of Canada’s cannabis producers are falling behind on tax payments.
Zuanic also wrote that “prices continue to decline, but less than in the past and we see signs of stabilization; also, we note companies gaining share tend to enjoy higher average prices.”
“We attribute this to a more discerning consumer and to companies realizing the race to the bottom is not sustainable,” he added.
Zuanic noted that flower’s share of the overall market fell to 40% in the third quarter of 2022 from 49% in the same period last year.
Pre-rolls accounted for 31% of sales in the quarter, up 16% from a year ago.
The growth in infused pre-roll sales represents “the most significant growth of any segment within the cannabis industry over the last year or two, given that it is growing very quickly and it is also very large,” Cooper Ashley, analytics manager with Seattle-based cannabis analytics firm Headset, previously told MJBizDaily.
Source: https://mjbizdaily.com/canadian-adult-use-cannabis-sales-growth-slowing-faster-than-expected/
New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.
The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.
Golden Roots operates the The Cannabis Revolution Dispensary.
The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.
The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.
Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.
After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.
In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.
The company requested a hearing, which the regulator scheduled for Sept. 1.
At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.
Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.
Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.
The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:
- Regulators alleged in August that Albuquerque dispensary Sawmill Sweet Leaf sold out-of-state products and didn’t have a license for extraction.
- Paradise Exotics Distro lost its license in July after regulators alleged the company sold products made in California.
Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.
Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/
Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.
According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”
Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.
The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”
The companies want the case to go before the U.S. Supreme Court.
They hired prominent law firm Boies Schiller Flexner to represent them.
The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.
Similar challenges to the federal Controlled Substances Act (CSA) have failed.
One such challenge led to a landmark Supreme Court decision in 2005.
In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.
In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.
Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.
“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.
“Moreover, the facts on which those precedents are based are no longer true.”
Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”
While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.
“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”
Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.
The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).
Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.
Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.
That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.
Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.
Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.
A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.
Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/
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