While reports of a downward trend in the Canadian cannabis market are worrying for investors, once the supply side recovers the ever present demand should heal the wounds.
News that green industry company Hexo laid off two hundred workers during a time of deep cuts has made the press shudder with disbelief. This has led to the question: Has the Canadian cannabis market cratered?
Financial outlet MarketWatch previously reported on a downward trend in the Canadian cannabis market, which it attributed to wide-ranging factors, such as an overabundance of government red tape, restrictions on advertising, a lack of retail space, worried investors, and bad industry actors exemplified by the scandal at CannTrust.
This lends credence to the notion that we’ve reached peak cannabis and that the industry needs to focus on survival.
However, before we can tell whether Hexo is the canary in the coal mine of a saturated and over-invested cannabis market a determination must happen. One that figures out whether the company’s financial straits are the result of calamitous market forces or simply gross mismanagement.
Is the Canadian Cannabis Market Dead — One Theory
While speculation about Canada’s cannabis industry won’t quiet down any time soon, it’s worth noting that this is a definitely a supply-side issue. The demand is — and always has been — present and high (no pun intended).
Bringing legal cannabis to the market is not like launching the iPhone. Cannabis is not a new product that people never knew they needed. It is an ancient form of medicine that’s been available and used in Canada since at least the time of the Vikings.
What’s happening now is less about supplying people with cannabis than it is figuring out a way to supplant an illegal market with a tightly-regulated legal one. Even if every company in the Canadian cannabis market closed up shop tomorrow, creative business people would still find a way to sling herb to a willing public. There’s just no stopping the demand. Especially now that more people than ever have had an opportunity to experience the substance in a state-sanctioned way.
Instead, this is more likely a case of a market correction. There were, possibly, too many businesses jumping into a space with huge potential and too many restrictions. It’s likely that we’re not seeing the beginning of the end of money-making for the industry. Instead there will be a culling of some of the weaker businesses. Survival of the fittest, if you will, like most competitive industries Darwinism takes over.
Can the Downturn Reach America?
So far, the sloping momentum in the Great White North has not crossed the border into the United States. However, that doesn’t mean America won’t be hit hard if the Canadian market crashes. In many ways, the U.S. is looking to Canada as a model, taking its cues from the success and failure there. And most importantly, investing in companies that can and do have potential to facilitate international sales and distributions.
But, the Canadian cannabis market has something that the U.S. doesn’t: Full-country legalization. By nearly every measure, the U.S. market is on the brink of explosive growth in the coming years, as more and more states legalize medicinal and recreational cannabis or expand their current laws to cover more kinds.
In the near future, the growth of America’s appetite for cannabis products will only grow. More Americans than ever want cannabis legalized in some form, and presidential candidates are increasingly making cannabis a top issue in their governing platforms.
Yet the lessons from Canada’s downturn should be heeded.
Will Canada’s Market Bounce Back?
There’s been much talk about investments and potential new consumers in the Canadian cannabis market. However, the realities for patients have been less promising than we’ve been led to believe.
According to one report, twenty five percent of medical cannabis patients in Canada are having difficulty locating their medicine of choice on store shelves. This trend is because of full-scale legalization, which is the reason so many consumers hit the market so quickly. They’ve crowded out medical patients.
But that’s not the problem. Not really. The real problem is that the Canadian cannabis market cannot meet the demand for either medical or recreational weed. When this happens in a laissez-faire system, retailers contract with producers to invest in greater amount of product. Some find new supply chains and bring in product from overseas — at a higher price.
The Canadian cannabis market doesn’t have that ability yet, thanks to tight restrictions. So, for now, the rampant growth we’d see in an open market simply cannot happen. So, like Hexo, a few more operations may tighten their belts in the coming months. But don’t count the industry out.
As long as people want cannabis, someone will supply it. Canada now has a choice of whether that supply will come from legitimate businesses or the black market.