Canada is still the reigning champion of cannabis in the industrialized world. In late 2018, the country legalized adult-use of marijuana in a bid to create revenue streams but, more importantly, to do away with the flourishing black market. Therefore, it comes as a surprise when Statistics Canada data shows that legal cannabis sales declined in January and February only to get back up in March.
The black market persists
The legal environment around weed sparked a certain amount of optimism among weed retailers concerning returns for their investments. However, just two weeks after Canada’s historical legal weed legislation, many private and government retailers owned more empty shelves. Supply for weeds kind of stagnated while demand shot through the roof. According to a cannabis retail store owner in Labrador, the supply gap hemorrhaged their investments badly.
The desperation of legal weed sellers could not be more clearly captured in this lamentation: “After a week of 100 apologies [to customers] each day, we’re tired of just saying sorry. We were told there would be bumps in the road. This isn’t a bump in the road. This is a pothole.”
Major cannabis players in Canada like Aurora Cannabis, Inc., (NYSE:ACB), Canopy Growth Corp., (NYSE:CGC), Cronos Group, Inc., (NASDAQ:CRON), among others supplied just under 1% of the $1 billion CAD anticipated by Statistics Canada for the entire 2018.
While the sales are stalling for the legal retailers, adult-users are increasingly opting for the black market. In particular, the legal supply chain is subject to stringent rules which hamper smooth flow of cannabis. On the other hand, many customers have complained about the quality of the weed sold in legal stores.
A buyer wrote on WeedMaps while reviewing such a store, The Hunny Pot, located in Toronto and said, “The product I got smelt like barn hay and was just as dry. The only reason I’ll go back is to get a refund for this purchase.” As such, the black market has stepped up to plug this gap.
Analysts prescribe caution on marijuana stocks
Citing the lackluster cannabis sales figures from Statistics Canada, BMO Capital Markets believes that investors should exercise caution while seeking exposure to cannabis stocks. In particular, there was little change between the sales figures in the first two months of 2018 and 2019. This indicates that the legalization might have failed to stimulate the kind of sales growth which was anticipated.
In a note to investors, BMO Capital Markets strategists said that the sales outlook in the near-term is muted. As such, profit margins are likely to suffer. However, companies like Aurora are already in the process of expanding production capacity via a multi-million partnership with Ultimate Fighting Championship (UFC). This will address the supply problems and push sales up for legal retail stores.
There is still stigma around weed
Another affecting sales is the stigma around weed. According to experts, while Canadians accepted the legalization of weed, many of them seem not to be celebratory about it. The experts cite the fact that since legalization, the cannabis industry has done well but even the Prime Minister has not acknowledged it. A government official commented that while legalization has met expectations, it is not the primary issue at hand. As such, analysts expect sales to underperform while the stigma continues to be present.