Connect with us

Business

Cannabis legalization | When profits go up in smoke

Published

on


Major cannabis producers are seeing red four years after the substance was legalized for recreational use. Losing money, they are struggling more than ever and their shares are in disarray on the Toronto Stock Exchange. If the euphoria was not with go for the investors, the portrait is different for the provinces as well as the consumers.

“We overestimated the demand, explains the chief investment officer at Triasima, André Chabot. Legalization was for Canada, but some were already expecting companies to sign sales contracts in the United States and elsewhere. None of this happened. »

Massive layoffs, production site closures and management changes: the news has rarely been good news for major cannabis producers. The future of Hexo, based in Gatineau, was even questioned by its own auditor a year ago because of its precarious financial situation.

For investors who have kept their shares, the picture is hardly encouraging. A $100 investment made in Canopy Growth on October 17, 2018 — the day cannabis was legalized — is now worth just $5.16. Only crumbs remain with Hexo (77 cents) and Aurora Cannabis (93 cents) for the same investment in each of these companies.


INFOGRAPHIC THE PRESS

Along with erroneous expectations, market fragmentation, the high number of players and downward pressures on the price per gram of cannabis largely explain the difficulties of the industry, according to Mr. Chabot.

“It’s a race to cut costs,” he says. The winners will be those who will succeed. There are economies of scale to be made and the consolidation is not over. We’re closer to the bottom than the top, but we haven’t hit the bottom yet. »

too many actors

In Canada, approximately 915 growers, processors and sellers are licensed under the Cannabis law, whereas the latter were once granted sparingly by Health Canada. There are 92 in Quebec.

This has contributed to a large increase in the production of dried cannabis in the country. From 2019 to 2021, it increased by about 40% to 1,616 tonnes, according to Statistics Canada data. Yet the industry is unable to dispose of its stocks. Last year, 425 tons of unsold dried cannabis were destroyed, according to the American media MJBizDaily, which specializes in the cannabis industry.

The risks of out of stock in the shops are low in the event of the sudden disappearance of a producer.

“There is still overcapacity even though producers have tempered their enthusiasm,” said Rishi Malkani, head of the cannabis sector at Deloitte. There are too many producers and the pie is not big enough. »

The latter anticipates a slimming diet in the industry. At the Quebec Cannabis Industry Association (AQIC), which has 75 members, we expect a few more “difficult years”.


PHOTO PROVIDED BY THE QUEBEC CANNABIS INDUSTRY ASSOCIATION

Pierre Leclerc, General Manager of the Quebec Cannabis Industry Association

“The industry has a responsibility and there have been mistakes, admits its general manager Pierre Leclerc. There was an understanding of the business community that was not entirely correct. Some companies have struggled with the ability to bring products to market. »

This ex-strategist of the Liberal Party of Quebec also throws part of the blame on the rigidity of the regulatory framework in place. In an interview, he finds it hard to understand how one can legalize an industry while putting its members “on the index”.

“Nobody communicated publicly that producers would not have access to any government program and that the vast majority of private companies would have difficulty opening a bank account,” says Mr. Leclerc. The state also has its responsibility. »

sellers in the green

The picture is much less gloomy on the side of the state corporations responsible for the sale of cannabis and its derivative products. According to a study carried out last May by the firm EY, approximately 70% of the money spent by consumers ends up in provincial coffers.

After a first fiscal year where start-up costs were responsible for a net loss of 4.9 million, the Société québécoise du cannabis generated a surplus the following year (2019-2020). The state corporation generated profits of $76 million last year, up 14%. This sum is intended for cannabis research and prevention.


INFOGRAPHIC THE PRESS

“While the industry fails to generate profits, the provinces reap by far the bulk of all revenue from the cannabis supply chain,” says Mr. Leclerc. They are the winners. »

Mr. Chabot agrees.

And the consumer? Since 2018, at the SQDC, he has seen the average price per gram drop each year since the legalization of cannabis for recreational purposes.

“If I take the transition of a consumer from the illicit market to the legal, he wins,” says the president of the AQIC. It is guaranteed to have a product that is extremely controlled and does not contain harmful substances. »

However, the Quebec framework does not allow the sale of edible products such as candies and desserts, which limits the supply. Mr. Leclerc also believes that the leeway of SQDC advisors does not allow consumers to be adequately supported.

In retrospect, the record of the last four years is mixed, according to Mr. Malkani, who puts the national retail market at 5 billion.

“Do you know any industries that can do this? asks the Deloitte expert. There are a lot of positives though. »

According to Mr. Malkani, there is an illicit market oscillating between 2 and 3 billion which can be converted. For the legal market, there is therefore still room for growth, he believes.

544 million

This is the amount that the SQDC estimates to have returned in consumption taxes and excise duties to the coffers of the Quebec state since its creation.

Sources: SQDC annual reports


PHOTO MARTIN CHAMBERLAND, LA PRESSE ARCHIVES

The legalization of recreational cannabis has not been a windfall for the industry. On the Toronto Stock Exchange, the major producers are struggling and are still in the red.

The “status quo is not an option”

The Société québécoise du cannabis (SQDC) is now well established in the Quebec landscape. The hiccups surrounding its launch after October 17, 2018 are just a bad memory, but the job is far from done. In office for a year, the chairman and CEO Jacques Farcy nevertheless has a few projects ahead of him. The manager takes stock with The Press on what awaits the Crown corporation.

Think about “phase two”

With its network of 90 branches, the SQDC is approaching its objective of 98 points of sale. According to Mr. Farcy, this footprint will be sufficient to continue to delight consumers on the black market. The boss of the state-owned company must however think of the “next three to four years”. “This will translate into a strategic plan that will be made public in February or March,” said Mr. Farcy. We are proud of what has been accomplished over the past four years, but one thing is clear: the status quo is not an option. »


PHOTO HUGO-SÉBASTIEN AUBERT, THE PRESS

Jacques Farcy has been president and CEO of the SQDC for a year.

Without opening his game, the latter pointed out that the SQDC was looking, for example, at certain accessibility projects. We are testing delivery in 90 minutes in major centers, which could be deployed on a larger scale if the tests are conclusive.

Convince consumers to come back

There are approximately 1 million customers who have migrated to the SQDC since the legalization of cannabis for recreational purposes. If he is delighted, Mr. Farcy underlines that these consumers are not “necessarily exclusive and that they can occasionally return to the black market”. “We have to make sure that customers choose us. It will be done with the accompaniment, the choice of products, the simplicity and the quality-price ratio. »


INFOGRAPHIC THE PRESS

How to get there ? With an average price per gram comparable to what is found on the black market as well as with an effort to inform customers. The president of the SQDC believes that consumers are unaware that certain categories, such as edibles and hashish, are offered in branches. “In our branches, you have a lot of products displayed on the wall, but you don’t necessarily have information that explains to you exactly what categories we sell. »

Labor relations

Relations have been stormy between the employer and the unions representing SQDC employees. The strike by members of the Federation of Public Service Employees, affiliated to the CSN, has been settled. Another walkout affecting 22 stores has been going on for about five months. These workers are represented by the Canadian Union of Public Employees, affiliated with the FTQ. Cautious, Mr. Farcy limited himself to saying that he trusted “the negotiating table” to resolve the impasse.


PHOTO HUGO-SÉBASTIEN AUBERT, THE PRESS

Striking employees of the SQDC are picketing in front of the head office of the Crown corporation.

But do these labor disputes suggest that the work climate is bad at the SQDC? “We promoted, last year, more than 100 people, answers Mr. Farcy. It’s a great organization to work in, I want to make sure the message gets through. When you open a branch, you receive a lot of applications. »

Relations with suppliers

Despite the financial problems of several producers, the SQDC is not worried about possible supply problems due to excess capacity on the market. The Crown corporation does business with 32 suppliers. His ways of doing things have changed in the last year.

At the start, the SQDC wanted to secure volumes from certain privileged producers. This is no longer the case. “We have gone from supplier management to management by product category,” explains Mr. Farcy. Today, we express our needs on categories. We communicate the information to the entire industry and that is what meets our needs, regardless of the supplier. We are at a stage in our growth where it was the right time to evolve. »

The changes have been rolled out gradually since the industry needs time to prepare, says the leader of the SQDC.

58.5%

Proportion of the black market that the SQDC estimates to have captured since its creation.

Source: SQDC annual report



Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *