Cannabis Glut in Canada
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Case Code: ECON090 Case Length: 16 Pages Period: 2018-2020 Pub Date: 2020 Teaching Note: Available |
Price: Rs.500 Organization : - Industry : - Countries : Canada Themes: Micro Economics, Pricing, Global Economy, Macroeconomic Environment |
Abstract Case Intro 1 Excerpts
Introduction
In May 2020, the Canadian Imperial Bank of Commerce(CIBC) slashed projections for Canada's recreational cannabis market for 2020 by 26% to C$2.5 billion, down from the earlier estimation of C$3.4 billion due to the COVID-19 pandemic. Since Canada had legalized cannabis for recreational use in October 2018, the industry had been plagued by supply issues and high prices due to government regulations, tax burden, and a compilation of complex security requirements that made the black market more attractive to price-conscious consumers. While cannabis sales increased after legalization, the inventory continued to grow much faster, resulting in a supply glut. As of March 2019, around 80% of Canada’s cannabis inventory was unfinished – meaning that the raw cannabis product remained unprocessed, and so could not be packaged and made ready to sell. Only 4% of the cannabis products produced in Canada were sold in July 2019; the rest were stored in warehouses. Overproduction and competition with the illicit market impacted cannabis prices. Rising stockpiles forced licensed producers to slash their per-gram prices in an attempt to compete more effectively with the black market. For the first time since legalization, the average price of legal cannabis fell 5% to C$10.12 per gram in the third quarter of 2019 from C$10.65 per gram in the previous quarter. Later, legal cannabis prices in Canada soared due to the limited volume of finished products, while the price in the black market was reportedly less than half that in the licensed stores. The average price of illegal cannabis across the country continued to decline from C$6.44 in the fourth quarter of 2018 to C$5.73 in the fourth quarter of 2019 even as the legal price of the product increased from C$9.69 to C$10.30 during the same period (See Exhibit I for Average Quarterly Price of Cannabis). Some legal cannabis customers complained about the high prices and poor quality and selection. Many of them returned to their black market dealers on the street. “Seventy per cent of total cannabis that's being consumed was purchased illegally, 30 per cent was from legal sources," said James Tebrake, Director General at the Macroeconomic Accounts Branch of Canada’s national statistical agency Statistics Canada.
The huge price difference between legal and illegal cannabis made matters worse for the industry, already struggling to minimize the underground cannabis market, which was one of the key reasons for Canada’s legalization of recreational cannabis. Oversupply, regulatory issues, and declining sales led to consecutive quarters of weak revenue for many licensed producers. Some companies reported revenue losses from recreational sales and found it difficult to continue their businesses. Analysts said there was an urgent need to regulate cannabis prices in the country as the gap between what Canadians spent on legal and illegal cannabis was widening. However, it remained to be seen whether the unfinished cannabis inventory would be ready for sale to meet the legal demand and bridge the price gap. "What remains unclear is why the planting of recently licensed grow rooms has not been meaningfully offset by the conversion of prior months' unfinished inventory into finished products for sale to provincial distributors given the apparent supply shortage in retail channels," BMO Capital Markets 9 cannabis analysts Tamy Chen (Chen) and Peter Sklar (Sklar) said.
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