Canopy Growth to reallocate marketing dollars

After a 25% sales and marketing reduction in Q1, the cannabis producer is now focusing on product quality, execution and expansion.
Medicinal Cannabis In A Plastic Bag And In A Cigarette - Alternative Medicine

Global net revenue for Canopy Growth was up 22% year-over-year, driven by 54% growth in its medical category, but Canadian net revenue was down 11% due to retail restrictions during the outset of the pandemic.

Canopy’s recreational B2B business – which sells cannabis wholesale to provincial agencies that then distribute it to stores – makes up 32% of its revenue mix, though net revenue that the segment pulled in was down 10% compared to Q1 last year. B2C recreational cannabis – done through its owned retail channels – makes up 8% of its revenue mix, and was down 12%.

Canopy Growth’s losses in Q1 were not as big as some analysts were expecting, but the company sees room to continue to improve its market share and offer more in-demand products. One way it plans to do that is by shifting its marketing investment to other growth opportunities.

In the first quarter of its 2021 fiscal year, which ended on June 30, sales and marketing expenses declined by 25% year-over-year. The company attributed this to lower compensation expenses resulting from its leadership restructuring – earlier in the pandemic, chief commercial officer and marketing leader David Bigioni was among the executives who had been let go from the company, done amidst a review that also included the elimination of 200 jobs (Canopy did not say at the time which departments had been impacted by the layoffs, but it did include its in-house creative team).

The company also attributed the drop in expenses to cancelled marketing and promo activities – representing a $10 million reduction – and reduced travel expenses due to COVID-19.

But the reduction doesn’t look to be a one-time event attributable to COVID-19. In a press release announcing the result, CFO Mike Lee said the company has reduced its headcount by 18% in 2020 – in addition to the other layoffs, the company eliminated nearly 600 jobs in the spring, mostly related to the closures or changes at its production facilities. Lee also said that both marketing and R&D investments were going to be reallocated “to programs with high-return potential in order to drive sales.”

The company did not specify which programs those would be, but during an investor call, CEO David Klein placed a lot of emphasis on opportunities with the company’s TWD value brand, the expansion of CBD and non-CBD products under its recently acquired BioSteel sports drink brand and adding more SKUs to its selection of RTD beverages. The company’s main focus seems to be on the U.S. market, both in terms of preparing itself for recreational THC legalization and expanding its reach in the CBD market. In addition to continuing the momentum it has seen with BioSteel there, it plans to launch its first CBD products in partnership with Martha Stewart next month and recently launched a U.S.-focused online shop.

Here in Canada, Canopy Growth says it leads market share for recreational cannabis in PEI and Nova Scotia, and is top three in most provinces’ recreational market. A report from the OCS earlier this year suggested most brands were struggling to come up with meaningful differences in market share in Canada’s biggest cannabis market, with ties and single-digit differences among the top five performers across categories. Klein said the company is “not satisfied” with its current positioning, but plans to address that by improving dried flower quality, continuing to optimize its product portfolio to focus more on quality and demand than variety, improved sales and operational execution to ensure it is on shelf at retail and through promotional activity that builds on the strength of the Tweed, Tokyo Smoke and Houseplant brands.

Canopy touted that it had gained the top market share position in Canada’s cannabis-infused beverage category, shipping 1.2 million products since the end of March and accounting for 74% of all ready-to-drink cannabis beverages sold in Canada.

However, there have been delays in the rollout of beverage offerings due to difficulties producers have faced with scaling beverage production and the fact that some ingredients interacted with the liners of cans in a way that reduced the products’ potency. That means competition in the cannabis-infused beverage space still remains thin. On most provincial cannabis retailer websites – as well as sites from private retailers like Fire & Flower – Canopy’s Tweed, Houseplant and Deep Space brands are the only RTD products available, alongside Everie, a brand created through a joint venture between Labatt and Tilray, and A1 Cannabis’ Basecamp and Summit brands. Other beverage products are a handful of loose-leaf teas and powdered or liquid extracts meant to be diluted in water.