Problems in the cannabis industry are mounting, and the looming marijuana bust means companies have to get creative regarding finances. In the latest industry shakeup, Canadian cannabis producer Cronos Group Inc. is exploring selling the company and talking with potential buyers. Cigarette maker Altria Group Inc. backs Cronos Group Inc.
The potential sale of Cronos is another blow to the struggling Canadian marijuana industry. Shifts in the marijuana market, high taxes, and oversupply issues continue to make it challenging for retailers and producers to keep their heads above water. Some in the industry are barely able to keep their doors open.
Sales Talks Are Underway
Currently, cannabis producer Cronos is working with a financial adviser to navigate the field of interest from potential buyers. Although no transaction is certain, there are whispers that U.S.-based Curaleaf Holdings may be interested in striking a deal with the struggling Canadian cannabis company.
Altria, a cigarette maker, holds a 41 percent interest in Cronos and had invested upwards of $1.8 billion in the company in 2019. However, for the first quarter, Cronos posted a net loss of $19.3 million. One year ago, that loss was $32.7 million.
As recently as June, Cronos Group Inc. announced that they would be ending their hemp-derived CBD operations in the United States by the end of this year’s second quarter. The move may have indicated that the company was in dire straits. The company says its decision helps them improve cash flow in the near term and streamline its operations.
In a press release, the CEO of Cronos says, “One day, the U.S. will be one of the most important cannabis markets in the world” but that Cronos’ “resources are best spent on staying laser-focused on becoming cash flow positive by driving cost savings and process efficiencies” for its “borderless adult-use products.” However, the move seems like it didn’t do enough to put the company in a better financial position, making selling the company the most viable option.
Problems Looming for the Canadian Cannabis Industry
This turn of events is not the first Canadian cannabis industry shakeup of the year. Recently, cannabis producer Tantalus Labs announced mass layoffs and a significant restructuring plan, hoping to keep the company solvent. Tantalus Labs touted itself as one of the country’s leading high-quality cannabis producers. However, their business model has continued to face significant challenges in the brutal Canadian cannabis market.
Other cannabis companies are also feeling the pinch. Toronto-based Fire & Flower Holdings and Ontario-based Phoena Group secured an order for creditor protection. The move puts their workers and operations in limbo for the time being. Statistics reveal that numerous federally licensed Canadian cannabis producers owe the Canada Revenue Agency more than 192.7 million Canadian dollars. That number is three times more than what has been owed in previous years.
What’s behind the Canadian cannabis bust? Canadian retailers, producers, and cultivators point to several factors that make the market nearly unsustainable for some businesses. First, it’s easy to go back and place partial blame on the COVID-19 pandemic. During the pandemic, people stuck at home with nothing to do flocked to cannabis companies searching for a little respite during tough times. However, as pandemic restrictions eased, the explosive growth and demand for cannabis began to wane.
Part of the problem with the Canadian cannabis industry centers around recession fears brought on by the pandemic. Scarcity of goods, supply-chain issues, and basic corporate greed combined to make the price of consumer goods soar. Individuals who had disposable income to buy cannabis products are finding their money doesn’t go as far today. Income gets funneled into necessities, and less discretionary spending is available for cannabis products.
Another problem for the industry is based in the fundamental laws of supply and demand. In Canada and parts of the Western United States, markets are experiencing an oversupply of products. Oversupply is excellent for price-conscious consumers because it makes cannabis products relatively cheap and affordable. However, oversupply for cannabis cultivators and retailers means some companies have had to consider closing their doors because they can’t pay their bills.
Current data suggests that Canada is still in a supply-and-demand imbalance. Since 2018, retail cannabis prices have fallen by nearly 30 percent. Canada’s unsold marijuana inventory has skyrocketed to almost 1.5 billion grams. Increased competition between businesses entering the legal cannabis market, combined with record crop hauls, means there is a glut of cannabis choices on the market, driving down prices while rent, utilities, and payroll climb. These factors create the perfect storm for cannabis retailers and cultivators struggling in an already oversaturated and challenging cannabis marketplace.
Finally, for some cannabis companies, the salt in the wound is the high taxes, fees, and regulations imposed on cannabis companies by the Canadian government. A group of Canadian CEOs recently joined forces for a press conference aimed at getting the attention of Canadian lawmakers, highlighting how strict government regulation impacts layoffs and facility closures. Some companies believe limiting new licenses, restricting competition, and easing taxes could help existing cannabis companies rebound from the harsh economic conditions of today’s cannabis market.
Can Canadian Companies Weather the Storm?
The news may sound like gloom and doom for Canadian cannabis companies. However, those that can weather the storm may come out the other side strong and more profitable. Canadian cannabis market forecasts still predict recreational cannabis growth into 2030. There is plenty of time to assess the success and failures of the Canadian recreational market and change course. Canada may even be in a unique spot to position itself as a global cannabis leader as they work through developing new strategies and innovations in the cannabis marketplace as other nations move to legalize cannabis consumption.