Three Canadian cannabis market insights for summer 2020

The COVID-19 pandemic has shifted the playing field for Canada’s legal cannabis industry. As new retail stores continue to open in Ontario, cannabis stores were designated as essential businesses. At the federal level, cannabis firms have lobbied for fair and equal access to federal business loans and credit. We believe that these are just some of the signs we’ve been looking for as the first signs of maturation arrives in the Canadian cannabis industry.

But these aren’t the only challenges and opportunities lying in wait for Canadian cannabis firms. Whether pandemic- or market-induced, we think these three macro trends will continue to propel the industry in new directions in the coming months:

1. Value brands are having a moment—but is it a sustainable strategy?

In the past six months, we’ve seen the value segment (cannabis priced under $6.50/gram) grow from 6% to 26% of the dried flower category. We don’t think the emergence of this category was an accident either. 

Many licensed producers and provincial cannabis buyers have had to alter course after realizing experienced cannabis consumers, rather than new or “canna-curious” consumers, are the target audience for dried flower products. These experienced consumers seem to have realized demands for price, potency, and value that were built in the illicit market; where many Canadian firms previously courted new or lapsed consumers, the growth in the value segment suggests that experienced consumers may be willing to migrate to the legal market when the value proposition makes sense. 

The challenge for licensed producers in the coming months will likely be capturing brand loyalty in a dried flower market where consumers are chasing value. A recent survey published by Brightfield Group found that consumers are making purchase decisions based on price rather than brand. The survey found that consumers are also suffering from decision fatigue as they see too many seemingly similar products.

We have long believed that operators should focus on a single link in the value chain. As Canadian licensed producers aim to meet consumer demands for quality at an affordable price, we think large-scale, automated, and purpose-built cultivators such as PharmHouse and Vert Mirabel, both Canopy Rivers portfolio companies, may provide the inputs needed to help the value segment thrive. We believe that there is room for more mainstream-priced products, but that operators will need to segment the market to create a use-case for a quality, consistent dried flower that customers will pay a premium for. In the meantime, we expect that value will continue to grow and dominate.

2. Still plenty of greenfield in cannabis 2.0

While the dried flower category has started to see an encouraging migration of experienced cannabis consumers from the illicit market, we think that underdeveloped supply capabilities for cannabis 2.0 categories represents a growth opportunity for license holders and brand companies alike.

We expect that new 2.0 offerings will be informed by consumer insights and segmented to capture specific audiences. The cannabis 2.0 products in the market today were largely conceived based on operational capabilities rather than consumer insights. We haven’t yet seen the emergence of brands that command a meaningful Canadian market share in the topical, edible, and high-potency concentrate formats. 

We believe that there is an opportunity for producers to offer a compelling entry point for new cannabis consumers in 2.0 products that they thought existed in dried flower and pre-rolls. In the coming months, we expect to see the emergence of brands that understand their audience and clearly communicate their value proposition to them - in our view, the field is still wide open. 

3. We see Canadian industry consolidation on the horizon

Despite several insolvencies in the past few months, we believe that the number of companies exclusively servicing the Canadian market remains overweight relative to the near-term market demand of both the domestic and international markets. 

Today, at least 24 publicly-traded and a handful of other private entities are focused exclusively on the Canadian market. And while it’s true that some of these harbor lofty offshore ambitions, international adoption of both medical and recreational cannabis regulation has generally been slower than initially anticipated. We expect that this will stunt the growth of some Canadian cannabis firms, leading to a thinning of the herd. Those that survive may have a clearer path to profitability, but we see the remainder of the year as survival mode for many Canadian firms.

While it may take some time to get there, we believe that this consolidation will eventually look similar to consumer packaged goods sectors, where a small number of large conglomerates market and distribute a variety of brands for different consumer segments.

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The Canadian cannabis market has faced its fair share of challenges since legalization. Despite these, we believe that 2020 has so far signalled a strong trajectory for the sector. As companies begin to better understand their path to revenue, who their consumers are, and what these consumers specifically want, we believe we will begin to see the emergence of trusted brands that will become mainstays in Canadian cannabis for the foreseeable future.

This is not an offer to sell or a recommendation to trade in any securities. This information is provided as of the date hereof. This document contains data obtained from third parties that Canopy Rivers has not independently verified. This document also contains forward-looking information within the meaning of Canadian securities law, which is based on certain assumptions. While management believes these assumptions are reasonable based on information available as of the current date, they may prove to be incorrect. Many assumptions are based on factors outside of Canopy Rivers’ control and actual results may differ materially from current expectations. Forward-looking information involves risks, including, but not limited to, the risk factors set out in Canopy Rivers’ most recent Management’s Discussion and Analysis and Annual Information Form. You should not place undue reliance on forward-looking information. Except as required by applicable law, Canopy Rivers assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances.