Proactive Investors - Canadian cannabis companies are looking to capitalize on trends to thrive amid ongoing challenges in achieving market stability post-legalization, according to a new industry report.
The Canadian Cannabis Report, authored by FoxNRTH founder and lead consultant Chris Murray for Prohibition Partners, identified noteworthy trends and potential new opportunities from across the Canadian cannabis market.
Here are some of the report’s key observations.
Unique products or pricing
There is an opportunity for new entrants to capture market share if they have a different approach with pricing or products, Murray wrote in the report.
He pointed to Calgary-based Decibel Cannabis Company Inc. (TSX-V:DB, OTCQB:DBCCF), which has been able to produce low-cost 2.0 products that are in higher demand in the Canadian market despite the company’s limited production capacity.
“Decibel does not attempt to focus on the premium market share with its offering but instead relies on the volume of sales for lower-cost products that will deliver consistent outcomes,” Murray wrote.
He also noted the increase in craft cannabis producers, with the shift toward smaller micro-cannabis cultivation facilities evidenced by the increase in micro-class licenses to 410 by September 2023.
“Smaller producers, despite facing challenges in navigating the complexities of international regulations and partnerships, are increasingly finding pathways to the global market,” Murray wrote.
“This trend is indicative of a market evolution where quality and differentiation are becoming key drivers, significantly shaping Canada's role as a leader in the global cannabis export market.”
Suppliers of new cannabis markets
Smaller Canadian producers have the opportunity to export their products and supply new markets as other operators are choosing to focus on domestic sales seeking immediate revenue instead of developing new international channels.
Canadian cannabis exports have surged, according to the report. In the 2022 to 2023 fiscal year, medical cannabis exports reached $160 million, up 50% year-over-year, according to data from Health Canada.
As producers seek to maintain access to emerging international markets, EU-GMP licensing is required, with an increase in the number of facilities seeking this certification.
“A facility that has EU-GMP certificate can package and prepare flowers, oils, extracts and edibles for Canadian suppliers on the way to the final customer or patient, in effect meeting all the needs of multiple regulatory jurisdictions,” Murray wrote.
“Smaller producers are able to work with partners in Canada and globally to package bulk material with the necessary GMP approvals, and to not bear the cost of internal EU-GMP certification.”
Supply chain optimization
Rising costs amid intense competition have been a sector-wide challenge for Canadian cannabis producers with many firms forced to scale back production, sell off assets, and slash their headcounts.
Murray noted the trend of cannabis companies embracing lean operational excellence and the implementation of technology and collaboration across the supply chain to reduce their production costs.
He cited Toronto-headquartered OrganiGram Holdings (TSX-V:TSX:OGI, NASDAQ:OGI) as one company that is “approaching logistics with a different mindset.”
“Their approach has been to work within their network of partners and look within the portfolio of their investors for partners who are able to provide extensions to their existing supply chain,” he wrote.
“The best example of this is Organigram’s relationship with Sanity Group (both of which share investors), managing to create a transatlantic supply chain which reduces the need for Organigram to manage distribution within the European market.”
New revenue streams
Operators are choosing to diversify their revenue streams, leveraging their manufacturing, cultivation, and other relevant expertise to add new product lines, ranging from orchids and vegetables to beer.
The most prominent example is Tilray Inc (NASDAQ:TSX:TLRY)'s purchase of multiple craft beer companies across the US, Murray pointed out.
“Although the future remains unclear, as current sales suggest that the industry is seeing a substantial decline, this diversity of revenue provides Tilray with a hedge in their operations as well as a significant operating footprint within the US market prior to legalization,” he wrote.
Emerging opportunities for brand differentiation
The report also highlighted ongoing reform around online sales in some Canadian provinces which will allow retailers to showcase brands on their websites prior to sale.
Murray explained that this could potentially allow brands to communicate directly with consumers who are engaging with them online, in turn, providing these brands with the opportunity to differentiate themselves from their competitors and resonate with consumers.
Medical market contracting, but remains important
Canada’s medical cannabis market remains significant, despite declining post-legalization as individuals gained easier access to cannabis through adult-use channels.
“Companies like Aurora Cannabis Inc (TSX:TSX:ACB, NASDAQ:ACB) have even reported a rise in their medical cannabis sales and patient base recently, indicating that the medical cannabis market still holds significant importance,” author Murray wrote.
The medical cannabis market size shrunk from C$600 million to about C$350 million between 2019 and 2023.
Prohibition Partners forecasts the Canadian medical cannabis market will stand at C$353 million by the end of the year, with further shrinkage to C$307 million by 2028.
In comparison, it expects the adult-use market to grow to nearly C$5 billion by 2028 from about C$4 billion in 2024.
Innovation and agility vital
Many of these key trends in the Canadian cannabis sector relate to the importance of innovation and agility in response to the evolving environment, both domestically and internationally.
Murray highlighted in the report that the cannabis market since inception has favored companies who innovate in what they produce, how they communicate, and the delivery of a consistent experience.
“As market share continues to distribute broadly, the companies that focus on this nimble approach will succeed, and when not laden by debt service costs, innovative risks are easier,” he concluded.