Cannabis producers embrace cheaper pot to help push against illicit market, oversupply
It took some time, but Canadian cannabis producers appear to have finally embraced selling cheaper pot.
The so-called value segment of the Canadian cannabis market - defined by one analyst as having a retail price below $6 per gram - has exploded in recent months: it accounted for slightly more than 40 per cent of all dried flower sales in July, up from 10 per cent of the market last September, according to industry data provider Headset.
The popularity of these “value" products has helped companies like Aurora Cannabis Inc. and Canopy Growth Corp. report better-than-expected quarterly sales figures, while also providing consumers with a competitively priced product that could lure people away from the illicit market.
"The value segment is really aimed at getting people in [the legal market], but the producer's job is to keep that customer and then trade them up to more expensive products," said Graeme Kreindler, an analyst with Eight Capital, in a phone interview.
But their prevalence may come at a price. By selling more cheap pot, cannabis companies may risk hurting their margins as well as sacrificing additional revenue despite being able to clear out inventory much faster, some analysts say.
There were more than 669,000 kilograms of unpackaged dried flower stored in cannabis producers' vaults across Canada in May, according to recent Health Canada figures. That could take well over a year to clear out assuming no more pot is produced in the country and if inventory isn't destroyed.
"What's been interesting to me was how some of the Canadian producers didn't understand that they could maintain higher prices per volume on flower products," said Stifel Financial Corp. analyst Andrew Carter in an interview.
"With excess capacity, there's always going to be someone that eventually decides to undercut everyone else."
That's what happened in October when Hexo Corp. launched its Original Stash brand, which sold about one ounce of cannabis for approximately $125, a price point that would match similar products found on the illicit market. Now, there is roughly a dozen cannabis producers who are selling similar sized options to the recreational market.
Carter said Canopy Growth recently embraced the value segment with cheaper bulk options after the company lost market share and needed to spur sales.
"If they can focus on growth, then maybe [Canopy] can win back some of its market share," he said.
Earlier this week, David Klein, chief executive officer at Canopy Growth, said that the value segment of the market is likely to command about half of the overall recreational market.
However, it might take a few more years for the Canadian cannabis market to show the various distinctive segments of the market such as value offerings or premium brands, he added.
"The consumer is just defaulting to the highest THC for the lowest price right now," Klein told BNN Bloomberg in a phone interview.
"Most of the [consumer-packaged-goods] categories like to define themselves by price points, but I don't know if the price points have been established yet in a meaningful way. We'll only know that once we go through this transition from the illicit market to the legal market."
While B.C.-based Tilray Inc. does offer a value product under its The Batch brand, it hasn't been a strategic focus for the company, said RBC Capital Markets analyst Douglas Miehm, in a recent research note.
"[Tilray] is targeting sales from higher-margin products, which in our view could hinder its revenue and [earnings before interest, taxes, depreciation, and amortization] ramp," he wrote.
Tilray CEO Brendan Kennedy said in an interview that he doesn't see cheaper cannabis on the legal market stopping customers from buying the pot producer's more expensive premium offerings. Indeed, he said people who are more interested in higher-quality products with better terpene profiles or visual appeal aren't the target market for value brands.
"A net new value consumer is coming from the illicit market, generally, and not coming from a premium segment of the market. So I don't see cannibalization," Kennedy said. "If we see the value market growing over time, that's probably a good thing because those value consumers are migrating from the illicit market."