After Canadian marijuana ‘Green Rush’, the struggle of pot suppliers

EXETER, Ontario – The mayor of the mostly rural community of South Huron, Ontario, was looking forward to a boom in employment when a marijuana producer used his high stock value to buy a huge greenhouse on the edge of the largest city in the municipality.

The purchase three years ago in Exeter promised that his broad community would become the main hub of what seemed like the next big Canadian industry: the legal pot and the high-paying jobs it would bring.

But before any of the 200 or so expected jobs in the greenhouse were filled – or before only one marijuana seed was sown there – it became apparent that Canada was already growing far more marijuana than the market wanted.

After two years of idle greenhouse, the million-square-foot greenhouse was sold last year for about a third of the original purchase price of C $ 26 million, or $ 20.75 million.

Exeter’s experience with the greenhouse – high hopes, followed by disappointment – mirrored the broader Canadian story with the business side of the legal pot.

Analysts say that one of the reasons why solar projections did not materialize is the tightly regulated distribution system introduced by Canada, which largely bans advertising and marketing. Stopping shopping in some provinces – especially in Ontario – is also a factor. In addition, research suggests that many Canadians are simply not interested in adopting a new vice.

“We were looking forward to it,” Mayor George Finch said, standing in front of Exeter City Hall from the 19th century. It sounded too good almost, didn’t it? Too bad. So maybe he’ll go back to vegetables again. “

Investors, however, thought otherwise, and in the time leading up to legalization, the “green fever” gripped the Toronto Stock Exchange. The money flowed into companies that began servicing not only the Canadian market, but also looking at other options, especially the U.S., where several states accepted legalization.

Long inactive greenhouses have been refurbished and sold at record prices like the one in Exeter, and new cultivation efforts have sprung up across the country. Newspapers that were downsizing hired reporters to cover new beats of marijuana. Like plastic in the movie “The Graduate,” marijuana seemed destined to become Canada’s next big thing.

The investment craze produced a strong echo of the dot-com stock boom of the late 1990s. And it ended in the same collapse.

Even with a slight recovery spurred by the spread of legalization in the United States – New York legalized marijuana last month and voters in four states backed legalization in November – one marijuana stock index is still down about 70 percent from its 2018 peak .years.

Two and a half years after legalization, most marijuana producers in Canada continue to record staggering losses.

And a new main competitor is looming: Mexican lawmakers legalized the use of recreational pots last month. Thus, the business climate for Canadian growers could become even more demanding.

“There’s likely to be a series of shakes,” said Kyle B. Murray, vice dean at the University of Alberta Business School in Edmonton. “Things were overblown. It’s very similar to a dot-com boom and then a crash. ”

Canopy Growth, the largest producer in the country, lost $ 1.2 billion, or about $ 950 million, in the first nine months of its current operating year. The layoffs have hit the industry. Large manufacturers have teamed up in an attempt to find strength in size. In many greenhouses in several provinces the lights are permanently turned off.

Big bets on marijuana, analysts said, were made on the assumption that marijuana sales in Canada would reflect the sharp jump in alcohol sales that occurred in the United States after the ban ended.

“Everyone thought the industry in Canada was going to move further, faster, and that didn’t happen,” said Brendan Kennedy, CEO of Tilray, a large breeder based in Nanaim, British Columbia, who lost $ 272 million last year. “One of the challenges around competing with the illegal market is that the regulations are so strict.”

Mr. Kennedy is among the few leaders in the Canadian marijuana industry that still stands. As losses piled up and stocks fell, most of the pioneers were shown the door. When the planned merger of Ontario-based Tilray and Aphria, creating arguably the world’s largest cannabis company, passes this year, Mr. Kennedy will remain a director, although he will no longer be at the helm.

In Ontario, sales were initially planned to take place through a branch of the state’s liquor trade system, as is being done in Quebec. But when the new Conservative government came to power in 2018, it quickly canceled those plans, leaving only online sales through the provincial website.

Since then, the province’s plans have changed two more times, leading to the uneven introduction of privately owned shops. Even after the recent increase in licenses, Ontario still approved only 575 stores. By comparison, Alberta, which has about a third of Ontario’s population, has 583 stores.

Although initial hopes for marijuana wealth were overly optimistic, Professor Murray said he was confident a viable business would emerge, and the growing number of stores in Ontario is one sign of that. The fact that prices have fallen closer to parity with street prices should also help legal sales.

“None of this means it’s a bad market,” Professor Murray said of a bad start. “In the beginning, too much money and too many companies were involved. Eventually there will be some companies that are very successful over a long period of time. And if we are lucky, they become global leaders. ”

One comparative bright spot was British Columbia, previously the heart of Canada’s illegal marijuana industry. There, sales in legal stores increased by 24 percent from June to October 2020.

And in Quebec, while the government’s cannabis store operator, Société Québécoise du Cannabis, lost nearly 5 million Canadian dollars during its first fiscal year, it has since become profitable.

Much disappointed at home, some of Canada’s major growers have highlighted foreign markets, especially medical marijuana, as their next big hope. But many analysts are skeptical.

Mexico’s recent move to create the world’s largest legal market could condemn most marijuana grown in Canada, said Brent McKnight, a professor at the DeGroote School of Business at McMaster University in Hamilton, Ontario. Trade agreements are likely to prevent Canada from stopping imports from Mexico, while significantly lower labor costs and a warmer climate potentially give it a competitive advantage.

“It would certainly create some pressure on local producers to cut prices,” he said.

And while Canadian industry is forced to consolidate to survive, some worry about who will lose as large companies in public sales come to dominate that space.

Long before legalization, many of the first stores to defy Canadian marijuana laws were nonprofit “sympathy clubs” that were sold to people who used cannabis for medical purposes.

The current system’s emphasis on large corporate growers and profits has pushed many people from minority communities out of business, said Dr. Daniel Werb, epidemiologist and drug policy analyst at St. Mary’s Hospital Michael in Toronto. Dr. Werb is part of a research group whose preliminary findings showed that “there is a marked lack of diversity” in the leadership of new, legal suppliers, he said.

Vendors in indigenous communities also remained in an unfortunate position, mostly not subject to police raids, but also outside the legal system, although Ontario began licensing stores in some of those communities.

“I am increasingly concerned, on the one hand, by the lack of ethno-racial diversity and, on the other hand, by the lack of imagination about the fact that this does not have to be a completely profitable industry,” said Dr. Werb. “It seems like a missed opportunity for creative thinking.”

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