David George-Cosh

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With cannabis sales hitting new monthly highs, producers and retailers take advantage of cheaper prices 

As the price of cannabis goes down in Canada, more of the stuff is being bought. 

Statistics Canada said Friday that $356.9 million worth of cannabis was sold in August, a new monthly record and up 5.2 per cent from the prior year. On an annualized basis, cannabis sales are up 42 per cent despite signs of the pace of growth beginning to slow down. 
Despite sales trending upward, the market itself is moving to sell as much of it as cheaply as possible. 

A slew of various data reports show the price of legal cannabis has dropped considerably since it became legal in Canada. Cannabis Benchmarks' spot price has fallen by about 37 per cent to $5.15 since January 2019, while the inflation figures show cannabis prices declined by 22.6 per cent since the end of 2018. 

With the price of cannabis dropping, producers like Tilray Inc. and Hexo Corp. — which are able to cultivate cannabis at scale for as little as possible — have been able to take those production gains and translate them into leading market share positions, as they also approach profitability.

"With several companies likely not able to sustain these lower prices, given their cost structure and production inefficiencies, we would expect the lowest cost producers to gain share," said Cantor Fitzgerald Analyst Pablo Zuanic.

The trend of lower prices has also resonated in the retail space. As retailers realize that the majority of cannabis consumers opt for price and convenience, they're turning to the same discount model that the illicit market employs.

That strategy has led to the rise of Nova Cannabis' Value Buds brand across Alberta and Ontario, where its stores sell about $3.1 million of cannabis annually, roughly one-third higher than the average store in the country. And as Nova looks to grow its network to more than 200 by 2023, it will have to compete with High Tide Inc., which announced this week it will aggresively move toward a discount model of its own with a loyalty program that will give its 245,000-strong members steep discounts on accessories and other products.

"We have specifically developed this retail concept to speak to the needs and preferences of today's cannabis consumer, with a focus on value, quality, and an exclusive product portfolio," said High Tide Chief Executive Officer Raj Grover, in a statement.

The sacrifice that High Tide will make on its margins, estimated to be around 10 per cent, will be offset by higher sales volumes, according to John Chu, an analyst at Desjardins Capital Markets. 
Despite the glut of cheap weed being sold across the country, the illicit market continues to linger. The Ontario Cannabis Store (OCS) said this week that illicit sales were estimated to still account for a slight majority of the market (52.9 per cent versus 47.1 per cent). 

Chu said in a report to clients on Friday that the OCS continues to expect prices to broadly move lower both online and in retail, which should help draw more illicit users into the legal market. 
 
THIS WEEK'S TOP STORIES

Hexo co-founder fired from top job following activist letter, Truss head to take CEO role
Sebastien St-Louis, co-founder and CEO of Hexo, was fired from his job from the company's board. The move was spurred on by a letter from Adam Arviv, an activist investor that represents along with the former owners of Redecan more than 14 per cent of Hexo's shares. The letter, sent in September, demands the resignation of St-Louis due to him delivering "poor financial performance" and calls a move to finance US$145 million through a public offering "further evidence of [St-Louis'] lack of qualified capital market stewardship." Hexo said later this week it would appoint Scott Cooper, the current head of its beverage unit Truss Beverages, as its new CEO. Cooper will continue to run Truss, which is a joint venture with Molson Coors, for the next six months until a replacement is found. 
 
Americans prefer to live in U.S. states that have already legalized cannabis: RedFin 
A new survey by Redfin found more Americans would rather live in areas where cannabis is legal than places where it isn't. That shouldn't be much of a surprise given that nearly half of the country has access to legalized cannabis for either recreational or medical usage, but it does indicate that a state that has some legal framework may see more people consider moving there when buying a new home. According to Marijuana Moment, the Redfin survey found that 46 per cent said they prefer to reside somewhere cannabis is “fully legal,” while 22 per cent would be fine living in a state that forbids the sale of legal marijuana. Only 12 per cent said they would only consider living in places where cannabis can be legally purchased. And perhaps more striking, just under one-third don't care about cannabis when it comes to where they live.  .
 
MJBizCon finally returns as cannabis industry descends on Las Vegas 
If you're in the cannabis industry (and you're reading this newsletter), there's a pretty good chance you're in Las Vegas this week for the return of the MJBizCon. The cannabis trade show, believed to be the biggest in the U.S., returns after a two-year hiatus due to the pandemic. It also takes place at an auspicious moment for the industry. Nearly a dozen states have legalized cannabis and billions of dollars have been spent consolidating the industry, with hopeful signs of federal legalization in Washington, D.C., during the trade show's absence. MJBiz Founding Editor Chris Walsh provided several industry predictions in a keynote presentation, noting that another four states will legalize cannabis next year, although it's unlikely to see full federal legalization. As well, any update on the U.S. Food and Drug Administration to allow and regulate ingestible CBD products will be unlikely, and more M&A is expected.   
 
Luxembourg, Switzerland move forward on legalization efforts  
European countries continue to move toward a more liberalized cannabis framework following recent announcements from two influential nations. The Guardian reports Luxembourg's government announced Friday that adults will be permitted to grow up to four cannabis plants in their homes, making it the first country in the continent to legalize production and consumption of the drug for recreational purposes. Cannabis seeds will be allowed to be sold in local stores or ordered online, while a state-regulated production and distribution system is in the works. Meanwhile, Switzerland plans to draw up a draft law to legalize cannabis after a health commission ruled that the current laws need to be changed. It appears that both medican and recreational sales will be considered with the law, while personal cultivation and taxation rates have yet to be determined. 
 
Illicit CBD products continue to be sold in Canada despite lack of regulations
No one really knows what is in the illicit CBD products being sold in Canada, the CBC reports. An investigation by the broadcaster found hundreds of illegal CBD products for sale across the country, with sales clerks making "extravagant and illicit health claims" about those items. Trying to test those products was deemed by legal experts as not possible because it could break laws that police controlled substances. Unlike the U.S., CBD is a controlled substance that can be only sold by licensed retailers as it is currently viewed as addictive and could be abused. As well, pet owners who give their dogs or cats CBD may be doing so illegally without actually realizing it. 
     
Analyst Call of the Week - ATB Capital Markets on Auxly Cannabis
It's a bit unusual to see a comany trumpet the fact that they're "number six!", but that's the release Auxly Cannabis Group put out on Monday. The company said it moved into the sixth-biggest licensed producer by market share, driven in large part by its commanding lead in vape sales, according to Hifyre data. It commands 5.7 per cent of the market in the third quarter of the year, up from 4.9 per cent in the prior three-month period, according to the data. Auxly said it expects to increase its share of the market to as high as nine per cent by the end of the year, while moving to positive adjusted EBITDA. ATB Capital Markets Analyst Frederico Gomes said the company still underperforms in the dried flower and pre-roll market, but it is gaining share and also has a pipeline of upcoming products that could serve as a tailwind to sales. Gomes has a $0.45 per share 12-month price target on Auxly's shares with an "outperform" rating, and sees the company trading at a 60 per cent discount to its peers 
CANNABIS SPOT PRICE: $5.15 per gram -- This week's price is up 1.0 per cent from the prior week, according to the Cannabis Benchmark’s Canada Cannabis Spot Index. This equates to US$1,890 per pound at current exchange rates.
 

WEEKLY BUZZ

76%

The amount of estimated illicit cannabis sales in the U.S. last year, according to New Frontier Data. The research firm estimates that by 2025, that number will decrease to 58 per cent.