Not all cannabis companies are going to make it through 2020

Published on April 30, 2020 by David Wylie

The next 18 months will be instrumental in revealing who will thrive and who will dive in the highly competitive cannabis sector.

A new report from CIBC Capital Markets says not everyone will make through the minefield that is 2020.

“Heading into 2020, the cannabis industry faced a barrage of questions,” says the report.

“How quickly can more stores open? How will Canadian players manage the derivative products rollout? Which businesses might fall by the wayside in a crowded industry facing capital scarcity?

“While these questions remain relevant, COVID-19 has added another challenge to an industry with no shortage of them.”

CIBC Capital Markets cut its cannabis sales forecast for 2020 by a billion dollars — down to $2.5 billion from $3.4 billion. And 2021 is down from $4.1 billion to $5.5 billion.

The Canadian cannabis market was expected to be propelled this year by a wave of cannabis stores opening in Ontario, as well as Quebec and BC. The COVID-19 pandemic has delayed that growth.

Not enough strains

Some of the more popular and prolific cannabis strains are lacking in Canada, something that the report notes.

Tight restrictions on importing and sourcing genetics are partly to blame for the market falling shy of CIBC’s projections.

GMO Cookies, Original Glue, Gelato 33, Mimosa, Purple Punch, Watermelon OG, Wedding Cake, Blueberry Muffin, Do-Si-Do, and Gary Payton are trendy and popular, but are unavailable or in short supply here.

“Some investors or industry observers may laugh at the nature of these names, but they’re an important part of cannabis culture, and they appeal to high-frequency consumers,” says the report.

Failure to launch Cannabis 2.0

Cannabis companies took a slap on the wrist over their “lack of readiness” for the launch of 2.0 categories – including  edibles, extracts and topicals.

“Some industry players publicly touted their ability to serve these products, but finding these items has proven somewhat challenging,” according to the report.

CIBC says it appears to be a ‘once bitten, twice shy’ approach from provincial wholesalers who are afraid of over-ordering and being stuck with products they can’t sell.

“On the producers’ side, stretched budgets mean LPs are cautious on new product development without some certainty that items will sell.”

Silver linings

While the projections are about $1 billion lower than expected, the 2020 forecast is still more than double last year’s $1.2 billion in sales.

Lower pricing on some products is helping sales — as low as $3.50 per gram in some provinces, which undercuts illicit dealers despite the additional costs.

“We believe some LPs have been forced to offer product at these prices to generate cash flow (or are choosing to win market share),” it says. “The reason is irrelevant, but the conclusion is clear: Canada’s LPs are addressing previous pricing inadequacies.”

COVID-19 has brought about forced innovation in the cannabis industry, bringing about changes to legislation to help social distancing.

“We expect we’ll see two years’ worth of innovations in two months. Items such as curbside pickup, direct delivery from stores, digital ordering, and text message notifications are underway and are supportive of industry growth.”