Happy 6th Birthday Canadian Cannabis…Now Start Worrying
"The only thing new in the world is the history you do not know” Harry Truman
Around ~80% of Canadian LPs are unprofitable. Understandably, most LPs blame this situation on punitive taxes, burdensome regulations, and a patchwork of provincial frameworks. Firms are clamoring for governments to ease their plight.
If only survival and success was that simple.
Sector ills are more fundamental and difficult to overcome.
The diagnosis can be found in an economics 101 textbook. Fact is, it is very difficult to turn a profit, fund growth or mitigate business risk in this kind of market when you lack sufficient scale or market differentiation.
Essentially, there are too many producers (many hundreds in fact) of commodity-like products for a market of our size. And I’m not even factoring in the tens of thousands of illegal operators and home growers.
Consolidation will help but it’s happening too slowly. The increase in bankruptcies is offset by new entrants. One would expect large LPs (who are small by market concentration) to be capturing a larger share of the pie. That’s not happening. Their total share of market revenues is declining. Sector capacity & inventory levels remain misaligned with demand, dampening prices and balance sheets.
To boost profitability and growth, many LPs have shifted some focus to international markets (including US optionality) and other categories like alcohol. While this kicks the ‘survival can’ further down the road it is no long-term panacea for most companies.
Net, the growing Canadian market is simultaneously fragmenting. This dynamic challenges the ability of most firms to achieve scale economies, fund innovation and build resilience.
This situation is not unique to cannabis. Every new industry of the past 150 years faced multiyear ‘booms, busts and recoveries.’ Cannabis is particularly susceptible to this cycle given that it’s an agriculture based, CapEx intensive product with major limitations on how it is sold.
The implications are stark.
The vast majority of firms won’t survive even with significant tax and regulatory relief (which is not guaranteed in the short term). They are in too deep, facing high-cost structures, debt overhangs (including CRA arrears) and restless shareholders. LPs will strike out securing inexpensive capital if they are a small, unprofitable and have a sickly balance sheet.
Time to face the music. You face a death spiral unless you can create scale or find market differentiation.
Start with these 3 steps:
1. Accept reality
2. Prudently choose one of 3 strategic lanes.
i) Go for scale through smart M&A.
ii) Leverage consumer-focused innovation, or
iii) Pick & dominate a niche.
3. Quickly reengineer your business model
Call me. I’ll help you navigate this strategic conundrum and reignite profitable growth.
#strategy #canada #LPS #anniversary