Canadian adult-use cannabis sales growth slowing faster than expected.
Matt Lamers, International Editor
November 3, 2022
Sales of adult-use cannabis in Canada are slowing more quickly than expected, according to a new report, and at least one analyst says structural changes are needed for the nation’s industry to recover growth momentum.
A report, written by Toronto-based analyst Frederico Gomes of ATB Capital Markets, notes that Canadian marijuana retail sales grew an estimated 7.7% year-over-year in September, which would be the lowest since legalization occurred in late 2018.
Decelerating nationwide sales add to a growing list of challenges for Canadian cannabis producers and retailers.
Some of those include:
Government-owned businesses are generating the only meaningful profits in the industry.
Those government-owned businesses, mostly wholesalers, are taking an unfair margin, business leaders say.
The industry continues to suffer from a massive oversupply of cannabis, with nationwide inventories reaching 1.4 billion grams (1,400 metric tons) and cannabis destruction since 2018 approaching another 1 billion grams.
Gomes attributes growth deceleration to:
Price compression, as less margin flows through to businesses.
Declining sales volume growth of unique items sold, meaning consumers are buying bulk.
Earlier this year, ATB warned that recreational cannabis sales growth rates had been slowing every quarter for the past two years.
“This trend indicates a market that is growing slower – and therefore is smaller – than previously anticipated,” Gomes wrote in the July note.
“The slowdown can be attributed to poor quality and high prices.”
The ATB analyst shaved 200,000 Canadian dollars ($148,000) off his 2022 recreational sales forecast for Canada.
Gomes noted sales volume growth decelerated over the past four months in categories such as flower and edibles.
“Since July 2022, flower volume declines have been, for the first time, superseding price per unit declines,” the analyst wrote.
“We believe this trend is reflective of a consumer shift towards legacy bulkier flower purchases. That is where the money is.
He noted that pre-rolls now account for almost one-third of the market. Last year, those products made up a quarter of all sales.
Structural changes needed
Pablo Zuanic, managing director at New York-based investment banking firm Cantor Fitzgerald, said growth of the Canadian adult-use market continues to decelerate.
In a note to investors, Zuanic said that even though Canada’s 13% year-over-year growth in the third quarter is better than the flat trends in U.S. state markets, Canadian per-capita sales significantly lag behind key states.
Zuanic noted that Canada’s per-capita sales were $90, compared with $120 in California, $150 in Michigan and upwards of $200 in Arizona and Massachusetts.
“We think structural changes are needed for the (Canadian) market to recover the growth momentum,” he wrote.
One such reform could be to the country’s excise tax structure. About two-thirds of Canada’s cannabis producers are falling behind on tax payments.
Zuanic also wrote that “prices continue to decline."
“We attribute this to a more discerning consumer and to companies realizing the race to the bottom is not sustainable,” he added.
Zuanic noted that flower’s share of the overall market fell to 40% in the third quarter of 2022 from 49% in the same period last year.
Pre-rolls accounted for 31% of sales in the quarter, up 16% from a year ago.
The growth in infused pre-roll sales represents “the most significant growth of any segment within the cannabis industry over the last year or two, given that it is growing very quickly and it is also very large,” Cooper Ashley, analytics manager with Seattle-based cannabis analytics firm Headset, previously told MJBizDaily.
