5 Problems For Licensed Producers in Canada
Since October 17th 2018, cannabis has been legal in Canada, and while licensed producers have sold billions in cannabis products to date, they’ve also posted billions in net losses each year.
Losses like these are indicative of any new industry, but there are some troubling trends in Canada that if left unchecked, could see major losses for licensed producers in the coming years.
In October of 2021, Bloomberg BNN published a fascinating article outlining the industry’s successes and challenges with 3 years of data to draw from. We find these insights into our evolving industry useful, so here’s a quick breakdown of the struggles licensed producers are facing each year.
THE PRICE WAR IS REAL
In 2021, there were 776 licensed Cannabis producers in Canada’s commercial cannabis market and the number keeps increasing.
The high number of producers makes for a competitive market, which is why we see a significant number of licensed producers consolidating to increase market share today.
With so many growers in the market, the abundance of overstock product forces cannabis companies to sell products at prices that amount to losses, while also destroying millions of grams of excess stock. This issue remains an ongoing problem for producers as the amount of cannabis being grown each year is increasing substantially.
Though sales of cannabis products have also increased, sales have just not been able to catch up to production by a long shot.
"It’s highly inefficient... We're seeing some very interesting things from licensed producers, dropping pricing to the point where they're losing money, quarter after quarter, negative margins, and just not making any money to their bottom line. It's a bit of a bloodbath out there for some licensed producers."- Mandesh Dosanjh, chief executive officer at Pure Sunfarms
"I guarantee you that a large part of the market currently is priced below people's cost to produce," he said. "That just means we're going to have more pain, more groups starting to kind of retrench and leave the market, and more large producer facilities shutting down." - Peter Miller, Former Chair of Agripharm Corp.
THC SALE LIMITS
In 2019, edibles, beverages, concentrates, tinctures and topical creams hit the market, dubbed ‘Cannabis 2.0’ products.
Though the introduction of these products represented new and diverse revenue streams to producers, the products came with THC limits that restricted consumers from buying any more than five cannabis-infused beverages at a time. This meant consumers would reach the limit when buying roughly 30 dollars of product, far below the amount one would spend before reaching the limit when buying dried flower.
According to a recent article by Bloomberg, this issue is in the process of being corrected and soon the beverage limit will be raised to allow a consumer to buy 48 beverages in one purchase, thus increasing projected revenue for producers who’ve invested capital in bottling facilities and have yet to see real returns on the investment.
TAXES, TAXES, TAXES
In the first three years post-legalization the Canadian government made over one billion in excise taxes by provincial and federal agencies. This figure does not include taxes upon point-of-sale, an additional source of revenue for the government. Excise taxes are a point of contention with licensed producers because they feel the current model of taxing different products is fundamentally flawed since the introduction of tinctures, topicals, edibles and concentrates have come into the market.
"The initial premise was $1 [tax] on 10 [milligrams of THC]. In a lot of cases, in the most competitive categories, it's $1 on 350 [milligrams of THC]. Well, that's a huge whopping difference." -George Smitherman, CEO of Cannabis Council of Canada
CAN’T SELL DIRECTLY
Another issue licensed producers have is that they are currently restricted from selling directly to the public. Norton Singhavon, CEO of Avant Brands Inc., believes that companies should be allowed to sell directly to the public even if it requires higher excise tax rates. This model is currently used by wine makers in Canada.
"How can I bolster my business to connect with consumers when I don't even know who my consumers are because my main customer is a wholesaler," -Norton Singhavon, CEO, Avant Brands Inc.
SLOW TO CHANGE
The 2018 Cannabis Act mandates that the Canadian government must conduct an 18-month review of the industry, however that review has been delayed many months by Health Canada. The review is only mandated to review the industry as it pertains to public health, cannabis use among youth, the impacts on indigenous communities and legal home cannabis cultivation. It remains an open question as to whether the review will address issues concerning regulations, excise taxation, the THC limits of edibles and restrictions regarding marketing.
The cannabis industry in Canada is still facing significant challenges with revenue for licensed producers and retailers.
It currently employs 151,000 people nation wide, is responsible for 15.1 billion in tax revenue since legalization, and has contributed 43.5 billion to our national GDP according to a 2022 study from Deloitte. That study also came to the conclusion that in just 3 years, Canada’s cannabis industry has already made many significant contributions to the nation’s economy - though the industry is still very much finding its footing in uncharted territory.
That said, the fact that we have legalized cannabis in Canada and are leaders on the world stage in this regard, should be a point of pride for canna-friendly Canadians despite the challenges facing the industry.