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Today’s podcast overview/transcript:
In today’s podcast we look at the Canadian Retail and Medical Cannabis sectors and how these two markets are currently developing and issues they are facing.
While Canada was the first G7 country to legalise cannabis and many were at first boldly optimistic about the Canadian cannabis market, we are now seeing a fairly intense period of consolidation and struggle due to a variety of factors in each province which has made many investors as well as cannabis operators reassess where the Canadian market is at.
A recent news article from CBC discussed the issues currently facing the Province of Alberta, a province that has, like Saskatchewan and Manitoba, become oversaturated due to granting too many cannabis licences.
In the article one Craig Kolochuk, CEO and founder of 13th Floor Cannabis was blunt in his assessment of Alberta's retail cannabis scene: there are too many stores, competition is fierce, price wars have broken out and dozens of locations are at risk of closing.
"Unfortunately, right now, there's blood in the streets. We're just carving up the pie too much and the market's not there. It's going to be ... who can persevere and who has a strong balance sheet and some supportive shareholders," he said.
According to the latest information from Alberta Liquor, Gaming and Cannabis (AGLC), there are 761 licensed cannabis providers in the province, with 194 of those located in Calgary.
"I think 30-40 percent of locations will be shut down in the next 12 to 24 months," said Kolochuk.
One analysis of the Canadian retail cannabis market, done earlier this year by data firm Cannabis Benchmarks, concluded that Alberta has too many retail outlets based on comparable data from Colorado and Oregon, two U.S. states that legalised the sale of cannabis in 2012 and 2016 respectively.
Het Shah, who compiled the data, says Colorado has one recreational retailer for every 9,600 residents, while in Oregon there is one store for every 6,150 people.
Alberta has roughly one retail outlet for every 5,911 people. By comparison, the national number is pegged at one store for every 12,184, according to Shah's research. He says there is room for expansion across the country, just not in Alberta.
"On average, we found that Alberta had roughly 27 per cent more stores than required to serve the population," he said.
This is an issue many Alberta residents, retailers and cannabis investors have been warning about since the onset of legalisation as Alberta, Manitoba and Saskatchewan were less restrictive on the cannabis licensing, initially to attract cannabis businesses and strengthen their local economies, but as time as progressed we are starting to see the repercussions of this lack of foresight, much as in the U.S. states with a more limited licence policy are facing less issues than states with a more open policy.
Now while for most small private retail operators this issue is reaching a breaking point, for larger retail brands such as DELTA 9 CANNABIS INC. (TSX: DN) (OTCQX: DLTNF) there is opportunity for acquisition and growth. Delta 9 just recently announced that on September 6, 2022 it completed a previously announced transaction with 10552763 Canada Corp. whereby, pursuant to the asset purchase agreement between the Company and the Vendor dated August 12, 2022, the Company acquired all or substantially all of the Vendor’s assets relating to the operation of three Garden Variety branded retail cannabis stores located in Manitoba, two in Winnipeg and one in Brandon.
“We are pleased to announce the closing of another strategic retail acquisition to grow our market share across the Canadian prairies,” said John Arbuthnot, CEO of Delta 9. “Delta 9 now operates 38 cannabis retail stores, positioning us as one of Canada’s largest vertically integrated cannabis retailers.”
Alberta, Manitoba and Saskatchewan are not alone in witnessing a consolidation period as we see a similar example with High Tide Inc. (NASDAQ: HITI) (TSXV: HITI), a leading retail-focused cannabis company with bricks-and-mortar as well as global e-commerce assets, who announced the completion of its acquisition, through Companies' Creditors Arrangement Act ("CCAA") Proceedings, of the final retail cannabis location out of the nine store portfolio for CAD$1.1 Million. The Store is located at 7555 Montrose Road in Niagara Falls, Ontario, and is situated in Niagara Square, an outlet mall anchored by numerous national big box and discount retailers.
For the three months ended April 30, 2022, collectively, the Store, along with the eight Choom locations that were previously acquired by High Tide, generated annualised revenue of CAD$10.2 million and annualised Adjusted EBITDA of CAD$1.3 million. The purchase price (inclusive of all nine Choom locations) represents 3.8x annualised Adjusted EBITDA for the three months ended April 30, 2022.
High Tide Inc. also just recently filed its financial results for the third fiscal quarter of 2022 ended July 31, 2022. One of the key highlights was revenue increasing to $95.4 million in the third quarter of 2022 compared to $48.1 million in the same quarter last year, representing an increase of 98%. Sequentially, revenue increased by 18% compared to the second quarter of 2022
We are not only seeing consolidation on a small scale with retail acquisitions and mergers, but also on the larger scale like with last month’s announcement from SNDL Inc. (Nasdaq: SNDL) and The Valens Company Inc. (TSX: VLNS) (Nasdaq: VLNS) who announced that they have entered into an arrangement agreement to combine their businesses and create a leading vertically integrated cannabis platform.
Pursuant to the terms of the Agreement, SNDL will acquire all of the issued and outstanding common shares of Valens, other than those owned by SNDL and its subsidiaries, by way of a statutory plan of arrangement.
With 555,500 square feet of cultivation and manufacturing space and 185 cannabis stores under the Spiritleaf and Value Buds banners, the combined company will offer a complete portfolio of branded products to consumers in Canada through its own supply and distribution channels. With approximately $314 million1 in net cash and no debt, SNDL will continue to have one of the strongest balance sheets in the North American regulated cannabis industry. SNDL will also have the highest pro forma Canadian cannabis revenue on a last fiscal quarter annualised basis.
Now while provinces like Alberta are having issues with an abundance of licences, in the province of Quebec, we are seeing a serious backtrack with their most recent move to make home growing illegal.
Recently in Quebec City, the Supreme Court of Canada heard arguments on the constitutionality of a Quebec law that forbids people from growing cannabis plants for personal use.
Janick Murray-Hall is challenging the ban on the grounds that it is unconstitutional and that it directly contradicts the federal Cannabis Act. Passed in 2018, the federal law makes it legal for Canadians to cultivate up to four plants for personal use.
"We seem to be putting aside the existence of this right to grow," Murray-Hall's lawyer Maxime Guérin told the nine Supreme Court justices.
"There's an opposition between the federal position and the provincial position."
The lawyer arguing on behalf of the attorney general of Quebec, Patricia Blair, told the court that the Criminal Code is meant to prohibit certain actions and does not give people positive rights.
That means the Cannabis Act does not entitle people to grow their own plants, it just makes it not illegal to do so, she said.
Quebec has been a province under constant criticism from the cannabis industry and cannabis advocates for continually lagging behind other provinces with regards to both its recreational and medical cannabis market run by the SQDC.
There has been criticism surrounding funding, licensing, distribution and recreational and medicinal access and things don’t seem to be improving.
One recent news story discussed how some medical cannabis operations have refused onboarding more patients due to funding issues.
Santé Cannabis is the only no-fee medical cannabis service covered by Quebec's public health insurance.
Patients would get a referral from their doctor, then be paired with a nurse-practitioner and physician to learn which cannabis products could work for their specific needs. The organisation does not sell cannabis.
"It really is an essential health-care service that isn't offered by the SQDC, isn't available in pharmacies and clinics or hospitals across Quebec, we're here because there's an important and critical need," said Prosk.
By law, only doctors and nurse-practitioners can write a medical document like a prescription for cannabis. But less than 10 percent of doctors in Quebec actually prescribe cannabis, the lowest in Canada, said Dworkind.
Even the more populous provinces of Canada have seen massive complications in their cannabis industry as both BC and Ontario have had recent meltdowns of their government run wholesale distribution networks with the BCLDB strikes causing layoffs and closures and the AGCO not faring much better.
As each province fails outright at effectively competing with the illicit market and continues to suffer from government incompetence and shortsitedness, the Canadian Federal government has launched their long awaited review of the Cannabis Act that came into existence four years ago legalizing cannabis in Canada.
The review is supposed to determine if the legislation is meeting with the needs and expectations of Canadians.
George Smitherman, president and CEO of the Cannabis Council of Canada said they welcome the review but want to see urgent relief from the tax and regulatory burden on legal cannabis producers to enable competition with the illicit cannabis industry.
“Some areas where we’re really in need of reform to compete better with the Illicit market are to restore some order of financial viability for licensed participants, to give us some more flexibility to communicate with our consumers and to reduce some of the regulatory burden that we’re experiencing,” Smitherman said.
CTV National News spoke with the former CEO of cannabis behemoth Canopy Growth, the president of the Cannabis Council of Canada, and a brand partnerships expert who currently works for a company that is connecting consumers with black market products.
While nearly everyone working in the marijuana game agrees that wholesale changes are needed, finding a consensus on how to move forward remains elusive.
Industry complaints range from sky-high taxes, government overreach and advertising restrictions to the proliferation of the black market.
Leafythings, an online cannabis directory, was recently given the “best innovative technology” award at a national industry gala, though their big win turned heads mainly because the products they offer online come from both licenced companies and unregulated retailers – which lawmakers still point to as illegal.
George Smitherman, the president of the Cannabis Council of Canada, believes that “the playing field is nowhere near level. There's illegal retail store fronts, there’s also considerable illegal delivery services which are also largely ignored (by the authorities).”
As this review continues Canadian cannabis companies such as Aurora Cannabis and Canopy Growth have both not only seen massive decline in their stock prices over the last two years but have also been dropped from the S&P/TSX Composite Index and S&P/TSX 60 Index.
As both investor confidence, consumer confidence both medically and recreationally and the confidence of cannabis business operators all continue to decline due to a market that has been clearly mismanaged by both the Provincial and Federal Governments, one can only guess what the results of this current federal review will be and how or if the Canadian cannabis industry can bounce back in the face of so much adversity.
Canada may have been the first man through the door when it came to federal legalisation but a success story it is surely not.
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