If you thought 2019 was disruptive, hang on to your hat as 2020 looks even more turbulent.
First, the good.
New products, legalized in late 2019, have finally started showing up across Canada. Edibles in many different formats – chocolate, soft chews, cookies, mints and others – are flying off the physical and digital shelves. The OCS in Ontario was sold out of edibles on the first day. A few weeks in, 21 out of 23 SKUs were still out of stock; hard to build a brand without the expectation of its availability! My quick check into a couple of bricks and mortar retail stores also found no edibles available. Vapes, both disposable and cartridges, were also very popular in the early days of Cannabis 2.0. There were some out-of-stocks, but they are generally available in physical and digital stores. Cannabis producers are banking on increased sales velocity from the new formats…literally banking on it (see below). Topicals, extracts and beverages in multiple formats are coming soon, and given that many of these have a track record of good sales performance and consumer acceptance in legal U.S. states, expectations are high.
The price of legal weed is often double the cost of ‘legacy’ weed – hard to get a frequent user to pay that sort of premium. Health Canada restrictions on marketing remain in place, severely limiting the legal cannabis industry’s ability to tell their story and compete with the black market. And there doesn’t seem to be a timetable or any sense of urgency with regards to regulatory change in this area. Similarly, the Canadian government should loosen the regulations around CBD (with less than 0.3% THC) like what has been done south of the border. In Canada, CBD-only products with health & wellness benefits remain isolated to the regular cannabis outlets where the focus is primarily on adult recreational use. These products should be available in drug stores, like in the U.S., where consumers purchase other wellness products.
The financial challenges that we saw in 2019 will continue well into 2020. Access to fresh capital has all but dried up, making cash flow through sales in all channels critical to the success, even survival, for many cannabis producers. These sales are dependent upon an ever-increasing number of new cannabis dispensaries, something that remains slow going in the largest provinces of Ontario and B.C. The new cannabis formats couldn’t have arrived fast enough, but with limited stores and little ability to market the “why you should buy your cannabis from legal sources and not from the (dangerous) black market dealer” story, Canada will see numerous cannabis companies seek bankruptcy protection in 2020.
There are challenges ahead in 2020. The cannabis companies with deeper pockets and differentiated brands will survive and have the opportunity to flourish in 2021, and beyond. Federal and provincial governments can also help, and they need to step up to allow the industry to compete with the black market. There are too many players and this year of consolidation is needed to allow the industry to get its proverbial shit together.