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Oversupply has taken down a publicly-traded giant (NASDAQ:CGC) in Canada's cannabis market. In a sobering piece published by Market Watch, the headline really says it all: "Once-mighty Canopy Growth loses billions as dream of pot riches runs into reality of oversupply and overspending.” Canadian Licensed Producers or “LPs” took an aggressive approach after full federal legalization occurred there in 2018. Many companies began installing excess capacity in order to prepare for the eventual opening of the U.S. market. Some of this capacity was utilized, but as Canadian retail deployments stalled and inventories there ballooned, the LP’s quickly realized that this expanded capacity would not be utilized and they had to eventually scale back. This scaling back of capacity was costly and severely impacted the Canadian’s bottom line.
This is not a Canadian phenomenon. The same thing is happening in the United States, as large MSOs have also installed capacity in newer state markets, particularly in medical states. The idea was to gain a dominant share of market early and then expand rapidly as states transitioned from medical to adult-use. In many cases, this strategy did not pay off as others entered the market and overall capacity was in excess of the total demand. With this excess capacity came over supply, declining margins, and tough decisions. When combined with rising input costs, a heavy U.S. federal tax burden, and lack of profitability, MSOs and small firms alike have had to rethink their business strategies. In some instances, larger firms exited saturated state markets entirely, while in other instances, they simply did not staff up their existing operations and let some sites remain idle.
There is a common theme here that indicated that countries are not learning from other countries, states are not learning from other states and mistakes are being repeated from market to market to market. I spend a lot of time talking about these issues at conferences as well as with clients, journalists and colleagues. As I visit markets all over the world, these are the kinds of common issues that I am frequently asked about.
Oversupply and undersupply issues in regulated cannabis markets
The price of legal cannabis products, especially relative to the illicit market
Consumer access to retail cannabis
Interestingly, very few firms are considering these three basic issues when examining market entry strategies or investment risks. Although difficult at times to obtain on one’s own, the data is out there nonetheless. The tools are available to not only identify risks, but to develop strategies to avoid or mitigate them. This is what my firm is doing and we wish more would. We can help businesses understand the risks and pitfalls that directly impact licensed cannabis business opportunities.
For a deeper diver into regulatory, operational and macroeconomic risk factors, please give us a call. Cannabis needs less risk and more success these days.
Beau Whitney, Chief Economist
Whitney Economics
503-724-3084
Beau Whitney is the founder and Chief Economist at Whitney Economics, a global leader in cannabis and hemp business consulting, data, and economic research. Whitney Economics is based in Portland, Oregon. Beau has provided policy recommendations at the state, national and international levels and is considered an authority on cannabis economics and the supply chain.
