Cannabis in Canada: Then and now

In part one of our three-part series, strategy explores how both new and established players are finding their footing in a competitive landscape.

Medicinal Cannabis In A Plastic Bag And In A Cigarette - Alternative Medicine By Will Novosedlik

In 2018, Canada made history as the second country – behind Uruguay – to nationally legalize cannabis for recreational use.

According to a recent report by research consultancy Brightfield Group, in 2021, legal Canadian cannabis sales grew to CAD $4.39 billion. Mary Beth Williamson, independent consultant and practice lead in Deloitte’s Centre for Cannabis, shares the key factors behind the sales explosion and the challenges the industry faces.

Growth Drivers

Top of the list is accessibility. Back when cannabis was legalized, Williamson points out there was a lack of stores, limited supply to choose from, and what was available was expensive. Now, in Ontario alone, there are upwards of 2,000 retail outlets and about 3,000 across Canada. There are parts of Toronto where there’s one store – or two or three – on every block.

Another driver is product quality. Licensed producers (LPs) are improving at the craft of growing bud, experimenting with genetics and cultivars and developing new strains. There’s also a greater variety of formats. “When cannabis was initially legalized, the only products allowed were flower, pre-roll and edible oils,” explains Williamson. “Now you can buy any kind of format you like. Cannabis 2.0 made vapes, concentrates, shatter, wax butter and live resin much more accessible through legal channels. And they’re all higher-priced products, so that’s driving growth as well.”

Then there’s pricing. Back in the beginning, flower was over $10 a gram. Now it’s in the $5-$6 range, making it competitive with black market prices, which likely explains why it’s estimated that the market share of legal cannabis has grown to 55%. If one of the government’s original mandates was to minimize the black market, it’s working. “I would say the illicit market was $7-$9 billion before legalization.,” says Williamson. “We’re at $4.39 billion for the legal market right now and headed for over five.”

Contending with Industry Challenges

The competitive landscape remains dynamic. Back in 2018, the top dogs were Aurora, Tilray, Aphria and Canopy Growth. Now, with numerous LPs out there, larger players are bleeding market share, and the top spots are occupied by different companies at any given time. According to the Brightfield report, Spinach, Back Forty and Dosecann are currently topping the charts. This volatility has disrupted the consolidation that everyone expected as new entrants flooded the market. The experts expected mom and pop shops to fold like bad poker hands as the larger players hoovered up their assets. But it hasn’t turned out that way. While bigger players still have an interest in making acquisitions, stock performance has been slow, so funding is evasive. And the little guys can’t get their valuations high enough to make selling attractive. So the market is still very much in play.

Then there are issues with overcapacity. “At the beginning you had to be vertically integrated to be in the business: you had to cultivate, process and package your own product,” explains Williamson. “Funding from investors was based on square footage of grow, so they all built all this excess footage. But now that cultivation capacity far exceeds demand, you’re seeing facilities like Aurora Sky getting shut down. As a result, most of the new entrants are starting up as more of a pure branded company where they’ll outsource production to someone else.”

So if the newbies are leaning into more of a branded model, how do you build a brand in a space with so many restrictions when it comes to mass marketing? According to Williamson, it’s much more of a relationship play and a social play, and a lot of it happens at point of sale. The key for LPs is to build relationships with budtenders, who are passionate about product knowledge. “It’s not like working in other forms of retail,” she says. ”Most of these folks are very happy to be working in the cannabis space so they’ll talk to you and their customers for hours about product.” Since budtenders are the interface between vendors and end users, there’s lots of competition among LPs for their preferential share of mind.

To build relationships with customers, LPs rely on their websites. Once customers opt in, there’s an opportunity to communicate directly with them through email, social channels and events. The biggest challenge of brand building is differentiation, especially when companies are not allowed to make any benefit claims. However, subtle signals are deployed to suggest what a customer can expect from different products. For instance, a dark blue package design suggests the strain will help you sleep.

Naming is also a way of ‘suggesting’ specific product benefits, and for now, regulators are not placing any restrictions on nomenclature. But the most significant means of differentiation, as mentioned above, is with product – and differentiating at the premium level gives brands a lot more wiggle room to manage their P&Ls. The Brightfield report notes that items such as concentrate-infused pre-rolls from brands like Qwest, Avana and Top Leaf are appearing at the premium end of the market. The differences lie in the infusions: for instance, Qwest infuses with hash while Avana uses live resin.

Differentiation can also be found in the variety of formats. Brightfield anticipates that the market share of pre-rolls will be multiple times higher in Canada than in the U.S. Apparently, Canadians take pre-rolls more seriously; in the U.S., they tend to be treated like add-ons.

Then there are edibles. Gummies are currently the most popular form, but restrictions on edibles with potential to appeal to young people means that shape is the only element producers can play with. So you have Spinach Sourz’ S-shape, Redecan Redebles’ crown design, Tweed Xpress’’ cannabis leaf design and Chüz’ -shape. The amount of THC a product contains can also be a factor in distinguishing it from others. “In the absence of great branding or being able to make claims, people are looking to get the most THC for the least amount of money,” says Williamson. “Three years ago in legal markets, 19% THC was considered high. Now it’s all in the 22% to 25% range.”

Lastly there are the minor cannabinoids. There are 50 products on the OCS list claiming to contain CBG (cannabigerol) and CBN (cannabinol). Although most people are familiar with THC and CBD, there are a total of 144 cannabinoids in a cannabis plant, so there is plenty of room for research and discovery of the properties associated with them. One of the original selling points of legalization was the expected tax revenue. Williamson claims the economic impact has been huge. “If you look at all of the licence holders, all the retail and the employment that goes with that, and all the capital expenditure that goes into cannabis on things such as building indoor grows and greenhouses, lighting, irrigation, pest control – all that has generated significant tax revenue.”

So what’s the key to success for LPs at this stage of the game? On this, Williamson is blunt. “Right now, the big players are focused on breaking even. Positive EBITDA and cash flow are king. The C-Suite is just worried about surviving right now.”