Cannabis retail competition set to heat up
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The deal will see Valens, which has traditionally helped other cannabis businesses manufacturer and distribute various products for the Canadian recreational market, take full control of one of the country's leading premium brands in what has been a highly lucrative space, said Jeff Fallows, president of Valens, in an interview.
"Citizen Stash is a very unique strategic opportunity for valid for a number of reasons," Fallows said. "It gives us access to that premium segment, but it also allows us to enter the [dried] flower space in … an asset-light way."
Citizen Stash doesn't have a major production facility but instead works with their own third-party network of cannabis growers to contract strain cultivation, which is then re-sold under the Citizen Stash brand.
"It's a very highly scalable model," Fallows noted. "It doesn't require a big investment in terms of physical infrastructure."
Several Canadian cannabis companies are expanding beyond their original product offerings since pot was legalized in Canada as the onset of competition from more than 700 producers has made it difficult for many firms to become profitable. Fallows said that Valens began exploring brand acquisitions following the onset of the COVID-19 pandemic when many of its customers were forced to cut costs, resulting in a loss of bulk shipment sales to the company. The announcement also comes about six months after Valens first announced a contract manufacturing deal with Citizen Stash to produce pre-rolls and infused gummy products for the firm.
"As Cannabis 2.0 came up, we began shifting our business model," he said. "But when all our large producer customers had to refocus internally and cutting some of their infrastructure in a COVID environment, that impacted us because they weren't buying those big bulk shipments as quickly as much as we anticipated when we got into the beginning of the year."
Sales of Citizen Stash products reached $21.1 million over the past 12 months, good enough to be ranked sixth in the Canadian premium brand category, according to cannabis industry data provider Hyfire Retail. Meanwhile, sales of Valens-made products in the Canadian recreational market reached $22.7 million over the past 12 months, the Hyfire data showed.
While the demand for premium cannabis products has remained steady at about 18 per cent of the Canadian flower market over the past year, the segment has been sought after by larger producers such as Canopy Growth Corp. for providing higher margins and greater stickiness for consumers in what has been a very fragmented legal industry. Canopy announced it would buy Supreme Cannabis Inc. for $435 million in April, while companies like Aurora Cannabis Inc. and Organigram Holdings Inc. recently highlighted a focus on premium cannabis products.
Fallows said that Valens intends to avoid competing on future product offerings with some of its current contract consumers while exploring other M&A deals, notably in the U.S. Valens acquired CBD maker Green Roads in April for US$40 million in a cash-and-stock deal.