Michael J. Armstrong is an associate professor in the Goodman School of Business at Brock University.
Recreational cannabis sales volumes continued their steady growth in June, in contrast with slumping medical sales. Processing and inventory levels, meanwhile, remain problems for licensed producers (LPs). But for legal cannabis over all, the opening of more retail stores increasingly seems to be the driver of growth.
Last week, Health Canada reported that combined medical and recreational sales in June totalled 19,590 kilograms, just 1 per cent higher than the number for May. Assuming Canadian monthly consumption of roughly 77,000 kg, that means legal sales captured just more than one quarter of the national market.
Medical sales fell to 1,535 kg for dry cannabis and 4,986 litres for cannabis oils, but those might be just random fluctuations. Since October, combined monthly medical volumes have seemingly plateaued around 6,730 kg, or about 9 per cent of national consumption. Growth might not resume until topical lotions and vape oils become legal later this year.
By contrast, recreational sales achieved their fourth consecutive monthly increase. Dry sales rose 8 per cent to 8,441 kg, while oils grew 17 per cent to 4,928 litres. Together, they covered perhaps 16 per cent of Canadian consumption.
Recreational volumes have grown 1,450 kg a month on average since February. If the industry sustains this recreational growth while maintaining medical volumes (both big assumptions), legal sales could capture half the Canadian market by August, 2020. Edibles’ arrival in December should boost that further.
Oils are becoming relatively more important recreationally. They constituted 28 per cent of recreational volumes in October, but 37 per cent in June. That could indicate growth in the “wellness” market, recreational users creating their own edibles or medical clients shopping at recreational stores instead of LP websites.
Recreational sales growth has largely been attributable to LPs’ increasing output of dry cannabis. In June, finished goods production was 20,098 kg, 4 per cent higher than the number in May, and more than double the amount in January. The higher output consequently boosted distributors’ inventories by 36 per cent.
That explains Alberta’s decision earlier this summer to remove limits on new retail licensing, and its comment last week about supplies now being healthy.
For LPs and their investors, dry-cannabis inventories deserve attention. In June, LPs harvested six-times more than they processed. Unfinished dry inventories now represent 13 months of processing.
Do the mounting stockpiles mean processing remains LPs’ main bottleneck, despite being nine months into legalization? Or do they imply that much unfinished cannabis isn’t worth finishing?
For oil, the concerns relate to finished inventories. LPs have enough for almost six months of sales, while retailers hold another four months worth. That could explain recent reports of retailers wanting to return oil products to suppliers or mark down prices to clear them out.
But while processing and inventories remain problematic for LPs, they no longer seem to be the main constraint on legal cannabis’ market share.
That seems increasingly related to retailer availability. June’s 11-per-cent rise in recreational volumes came after an increase in the number of licences issued across the country. Store counts were 21-per-cent higher in early May compared with early April; 10-per-cent higher in early June compared with early May; and 23-per-cent higher in early July compared with early June.
If retail is becoming the new driver, then July data should show generous sales growth.
This makes Alberta’s retailing policy look increasingly inspired. It had 65 stores open in November, more than any other province. It resumed issuing licences in spring and now has 279 issued, more than all other provinces combined.
Conversely, Ontario’s approach seems misguided. Its initial limit of 25 stores was reasonable, given the limited supplies and information available last December. But its July decision to only add 50 more stores this fall looks out of touch with spring’s supply improvements.
I’ve often told interviewers to expect three phases in Canada’s legal cannabis rollout. Since October, we’ve experienced Phase 1, where sales have been limited by LPs’ ability to ramp-up production. Though that issue still remains, we’re apparently transitioning into Phase 2. That’s where legal market share depends on provinces having enough stores to make products accessible.
The third phase, in which legal products compete head to head with illicit markets on price and quality, still seems a ways down the road.