The Great Purge Of The Canadian Cannabis Industry 🌿

With a lack of product differentiation prices will continue to fall, and large producers only have themselves to blame.

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Friends,

In the lead-up to cannabis legalization here in Canada, many licensed producers laid out their plans for profitability—predicated on the notion that they would have the means to charge upwards of $15/gram CAD.

Well, fast-forward to today and many of these producers are now struggling to find someone to pay $3/gram wholesale for the mountains of cannabis they are sitting on. With cannabis prices continuing to fall, something’s got to give.

Ask any economics student what happens when supply increases and demand remains the same, and they will all give you the same answer: prices fall.

The start of what’s to come…

One of the clearest indications that this price compression is already upon us? The data that the Ontario Cannabis Store released last week.

In less than a year (Q2 2019 > Q2 2020), the average price per gram of legal cannabis sold on their e-commerce site fell by over 40%, moving from $10.70 to $6.41 CAD 👇🏽

This is a sharp decline, and it reflects the strategy that many LPs are implementing in order to move those mountains of inventory they currently have in their vaults.

What is this strategy you ask? Simple, decrease the prices and offer larger increments (14 and 28 grams) in order to reduce the cost of packaging each unit.

*Each province in Canada was given a certain amount of latitude to determine the regulations they would put in place, and Ontario granted themselves a monopoly over e-commerce sales across the province.*

What’s the problem(s) with this strategy?

There are two sides to every coin…

I could argue that declining prices in the legal cannabis market will only make it more competitive, in turn solidifying the case for legalizing cannabis as a means of undermining the illegal market. But producers still need to turn a profit to pay staff.

With such sharp price compression occurring in the last year correlated to the increasing surplus of cannabis being produced—one has to ask, just how low can prices go? 💸

Personally, I can see prices being slashed in half once again in 2021 and the end result of this compression spiral being a long list of producers filing for bankruptcy.

That is unless things change. 👇🏽

Every problem has a solution

In order to successfully create and implement any solution, you must first define the problem.

In this case, the problem can be broken down into three parts:

1️⃣ Choosing Quantity Over Quality

In the lead-up to cannabis legalization, many producers decided to ramp up their production capabilities as they acquired cultivation facilities for billions of dollars and aimed to produce thousands of kilos to meet an unknown demand.

If you had asked any experienced cannabis grower, they would have happily informed you that scaling your cultivation capabilities this quickly would have a serious impact on the quality of the products they were producing. And guess what? It did.

We’ve all made mistakes, myself included; but an error doesn't become a mistake until you refuse to correct it. If any producer wants to remain in business come the end of next year, they need to focus on producing high-quality cannabis, not a high quantity of cannabis. 

The solution: Choose Quality Over Quantity

Great examples: North40 Cannabis and Gnomestar Craft Cannabis.

(📸 / Gnomestar Craft Cannabis)

2️⃣ A Clear Lack of Product Differentiation

Emphasizing your product’s “High THC content” is not a marketing strategy; it's laziness. 

One of the biggest problems with the value category (low-cost cannabis) that has emerged is the approach many producers are taking to market their products, with too many offering high THC for low prices. 

I get it, consumers want high THC products; however, using this as the basis of your marketing strategy is a race to the bottom. What’s unique about your brand, what does it stand for, who is it meant to delight?

The solution: Choose an audience to delight, learn everything there is to know about them to discover their unmet needs and define what makes your product unique. 

A great example: GTEC, and more specifically BLKMKT.

(📸 / BLKMKT)

3️⃣ Too Many Producers, Too Few Consumers

Someone much smarter than me once said that knowing your weakness is one of the best strengths anyone can possess. The same is true in business.

If you're struggling to compete in the increasingly competitive category that is cured cannabis flower, then maybe it’s time you start looking elsewhere?

As more and more consumers enter the cannabis market (remember that a mere 15% of Canadians consumed cannabis last year compared to the 78.5% who consumed alcohol) many of the newbies may skip smoking altogether for other form factors such as edibles, drinkables, topicals, and sprays. I view this as an enormous opportunity rather than bad news.

The solution: Create products that appeal to a new category of cannabis consumers—such as beverages, teas, topicals, and patches—to retain those customers and expand the market.

A great example: Hexo, and especially Truss beverages.

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