Front Burner - Will the legal weed business be okay?

Episode Date: February 14, 2023

A few days ago, Canopy Growth Corporation, one of weed's biggest players, announced significant cuts and the closure of its headquarters in Smith Falls, Ontario, resulting in 800 layoffs for the town's biggest employer. Canopy reported a net loss of $267 million this quarter, bringing the struggling company's losses in the first three quarters of the year to $2.6 billion. Today on Front Burner, Solomon Israel, a reporter with MJBizDaily, joins us to discuss the closure and what this means for a slowing cannabis industry.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Jamie Poisson. A few days ago, Canopy Growth, one of Canada's biggest cannabis companies, announced major cuts. It's laying off hundreds of workers, more than 300 immediately. In the coming months, that number will climb to 800. It's also shutting down

operations in its Smith Falls, Ontario facility, where it was headquartered out of an old Hershey chocolate factory. Canopy had been this industry darling, full of promise a little more than just four years ago. Today, as Canopy and other companies struggle, what does the future hold for legal weed in Canada? Solomon Israel is here. He covers the cannabis industry for MJBizDaily. Solomon, hey, thanks so much for coming back on to FrontBurner. Hey, Jamie. I'm really glad to be here again. So this Smith Falls facility, it got a lot of attention, right, a couple years ago in the time leading up to legalization in late 2018. And you've been to this old Hershey's factory, right? What was it like?

Can you describe it for me? Yeah. I mean, you know, I went there. I think it must have been in the beginning of 2018. It was before legalization. And I went there to cover a group of Canadian senators who were kind of doing some fact finding as they reviewed the cannabis legalization legislation. They took a tour of this facility and the press were invited along to join.

So, yeah, I mean, you know you know from my perspective like i've toured a bunch of uh legal cannabis facilities in canada and it didn't like on the inside it didn't really stand out to me as being that different from a lot of the other ones right it was obvious that a lot of money had been put into it uh if you know like you kind of walked into this like pharmaceutical grade growing area where like fluorescent lighting in the hallways you could see into the growing rooms where yeah you know all the real growing lights were uh you had to like put on a special outfit before you entered clearly there was a ton of money put into the facility um you know definitely in terms

of like the hvac you, not to mention money spent on like climate control and lighting and stuff like that. I don't have a comparison for what, you know, how it differed from the old Hershey factory that was there because I never went to that factory. But yeah, I mean, it was a big facility and you can tell they spent a lot of money putting it together. So, you know, what was it that you think made this facility so notable? Like, you know, what was it that you think made this facility so notable? Like, you know, I know a lot of money went into it, but it got like a ton of press. Like you said, all these politicians came and why this facility? Why was it such a big deal?

Yeah, I was kind of reflecting on that. Like, why was this? Why did people care about this facility? I think part of it was that it had this kind of storied history, right? This facility was this Hershey factory that opened in the 1960s. It was a tourist attraction. Tours of the facility were very popular. I think there were like a ton of tourists came every year to see this factory.

It wouldn't be uncommon to see 40 or 50 school buses in a given day at Hershey. I think one year they had 450,000 people go through. The buses used to come and line up in the parking lots. People used to come in by up in the back and lots. People used to come in by the thousands and walk around and look at production taking place. Hershey announced it was closing in 2007. They finally closed it in 2018. And then Canopy Growth, which, you know, before it was called Canopy Growth, they were called Tweed.

They took over the factory in 2013. Obviously, that was years before. I mean, that was years before we even knew that recreational cannabis was going to be legalized in Canada. But at the time, medical marijuana was legal. And they took over this factory to build a medical marijuana production facility. And so yeah, just in terms of why it mattered, first of all, they had a really good story, right? This like, oh, well, we took over, Hershey moved the plant to Mexico, and all these people were out of jobs. And now we took over and we're bringing those jobs back to the community. And now Tweed is resurrecting the tourism tradition. And they come up to the door and they knock.

And the same question or the same structure is, I was here like 15 years ago. I wonder if you still do tours. And we have to explain, well, now we do. But what you see and what you smell is totally different. I think there's also the fact that it was close to the center of power in Canada, right? It's close to Ottawa. So it was accessible to politicians for tours and photo ops, that kind of thing. Ease of the photo op.

Yeah, exactly. Also, maybe worth noting, in 2018, Snoop Dogg partnered with Tweed, right, to distribute his products. Which, you know, probably didn't hurt either. The facility being shut down wasn't the only part of Canopy Growth announced cuts, right? Like, what else is it changing? Yeah, so they, I mean, first of all, just to put it in context, this is not like the only time Canopy Growth has cut jobs in recent years. Like, they've closed several facilities and done a lot of different cutbacks over the years as they kind of try to get their finances in line. They say, I was just kind of like reviewing what they said in their financial

filings, they're going to be consolidating their cultivation at some other production sites they have. This is not the only site they have. So there's one in a place called King Cardian in Ontario. They've got one in Kelowna, BC. They have some involvement with a facility in Quebec where apparently they're no longer going to be sourcing cannabis from that facility anymore. They're also, it looks like they're going to be buying, they say the exact quote from their news release is moving to an adaptive third-party sourcing model for all cannabis beverages, edibles, vapes, and extracts, which will enable us to do this stuff without investing in research and development and

production. So basically my take is they're going to be buying some of their cannabis that they use to process into cannabis extract products. They'll be buying that presumably on the wholesale market from other producers. That was kind of what I took away from that. Right, right. And so what might be like a criticism of that? I mean, from a financial point of view, I think that might well make sense. Like they don't necessarily, you know, part of Canopy's issue, which I think we're going to be getting into

throughout the course of our discussion today, is that they had way too much growing capacity in relation to the demand for their products. And that was a real problem for them. They were spending more money producing cannabis that they could not sell. And so, yeah, it might actually make sense for them to be buying some of it from other companies and then processing it. Yeah. Yeah. I mean, they're still going to be growing some cannabis. They're still going to be manufacturing products. And they're not entirely out of Smiths Falls either.

Apparently, there's another facility that they had there in Smiths Falls that they're going to continue to use. And there will still be some jobs there. But it's like the big kind of facility that everyone knew about in Smiths Falls that is going to be closed. Yeah. And fair to say a lot of these job losses are coming from there, right? Like this is not great for the town of Smith Falls. Yeah. I mean, it's like we've heard this story in all kinds of industries, right? You know, there's a town that's dependent on one big employer and then there's

serious trouble when that employer has trouble. So tell me a little bit more about how Canopy explains why they had to make these decisions, right? You know, they said several things in their news release about this. And this came out at the same time as their quarterly earnings. So there were financial filings related to that as well. And in that news release and the financial filings, one of the things they cite is that there were these government wage subsidies during COVID that Canopy and a number of other cannabis companies took advantage of. Those wage subsidies during COVID that Canopy and a number of other cannabis companies took advantage of. Those wage subsidies came to an end. So all of a sudden, they're on the hook for more employee costs. On a quarterly earnings conference call, the CEO of Canopy Growth, David Klein, he mentioned

that the black market still controls, he estimates 40% of cannabis sales in Canada, which is in line with other estimates I've heard. No one really knows exactly how much the black market for marijuana is worth in Canada. Certainly those things are bad for Canopy, but I don't know, especially the complaining about we have to compete against the illicit market and the government hasn't stopped the illicit market from happening. In my opinion, that doesn't really pass muster as an excuse for this company's troubles. And I say that because there are other cannabis companies, maybe not tons, but there are certainly a handful of publicly traded cannabis companies that are performing much better than Canopy and are,

in fact, making profit. So then what do you think the reason is? And because it's not just Canopy, that is posting big losses and laying off tons of people. Of course, I take your point that some companies are doing well, but Aurora Cannabis just posted like $67 million net loss in second quarter, right? Hexacore have seen like huge drops, right? TerraSN, the Kronos Group, right? what I think a lot of people would describe as like a pretty crazy collapse when it comes to a lot of these bigger companies that were sort of held up as as like the leaders right sure I think it all goes back to what was a crazy stock market bubble around cannabis ahead of legalization and I want to just be I want to be really careful

and specific here to say that not every cannabis company and not every publicly traded cannabis company did or sort of was involved in the pattern that I'm about to describe, but several of them were Canopy, Hexo, Aurora are all good examples. So basically, there was a situation where we had these companies that were growing medical cannabis legally in Canada. They were preparing for recreational marijuana legalization, which you might recall was October 2018. They were publicly traded. You could just buy shares of them on the Toronto Stock Exchange and then later on some American

markets as well. And it kind of looks like this. They raised a ton of capital from people who were really excited about getting in on the ground floor of these companies ahead of this market launch. And they took that capital and they used it to build out a lot of production capacity, a lot of production capacity. to build out a lot of production capacity, a lot of production capacity. Their plan was to grow lots of cannabis at scale at the lowest possible cost and sell it to... I mean, there were all kinds of predictions for how big the market would be, but the idea was that there would be huge

demand for recreational cannabis. And as soon as the government flipped that switch and legalized it, then they would have all this weed that they were ready to sell to people who'd be ready to buy it. And that created this kind of cycle, right? Where the more capacity that these companies said that they had ready to go, the more people were willing to put money back into these companies because it looks so promising. And then they took that money and they created more capacity. And so fast forward to October, 2018, it's legal. But the market just didn't pan out quite the way they thought it would, at least not immediately. And there's a bunch of different reasons for that. A big part

of it was that there simply were not enough stores. There were not enough physical stores at the outside of legalization for people in many places to buy cannabis. If you are a habitual cannabis user, and cannabis is an industry like beverage alcohol where most of the revenue comes from habitual heavy users. If you're a habitual user and you have a source, an illegal source that works well for you, there weren't very compelling reasons to switch to legal cannabis at the outset.

It was fairly expensive. The stores were not always accessible or convenient. Why would you if you were already happy with what you had? In Ontario, the biggest province in Canada, there were zero physical stores at legalization. Now we're approaching like, we have more than 1,600 stores in Ontario now, so that problem is solved. But at the beginning, it was really tough for these companies.

On that point, now I walk down the street, I feel like every third store is a cannabis store. Oh, yeah. So what's the problem now if there was that backlog at the beginning? What's going on now? Yeah. So in the intervening time, a lot of things have happened.

Way more stores have opened up in most places in Canada right now, and it really varies province by province. But in most places in Canada, if you want to go buy legal cannabis, you have a store near you where you can go buy it, you can buy it at a pretty good price. In fact, but a lot of things happen between then and now. Quality wasn't great at first. So I think that I'm painting with a broad brush, but there were a lot of complaints about quality, especially as

compared to the price. It took a long time for the number of stores in most places to ramp up to what people saw or wanted to see. Some products, it took another year after legalization for certain products like cannabis edibles or vape pens to become available on the legal market. And by the time all those problems had been solved for various reasons, and in particular, the fact that there was so much growing capacity, um, you know, among us, a certain number of really big companies, the price of cannabis had just plummeted, you know, like I, I lived in Manitoba during legalization and, uh, you know, you could go to the store in October, 2018 and buy cannabis for like $12 a gram or something like that. Um, and you might be willing to pay that because it was novel. And hey, of course you want to be

one of the first people to buy legal weed. You can go to the store now and you can buy cannabis in bulk at like $4.50 a gram, which is great. It's fantastic for consumers. It's fantastic in terms of addressing the problem with the black market, because they can compete on price now with illegal cannabis. But, you know, these companies can't sell it for nearly as much as they thought they could at the outset. I'll see you next time. entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo, 50%. That's because money is confusing. In my new book and

podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. Explain to me, and I feel like you're kind of pulling this thread, but just why the price has dropped so much. Yeah. I mean, part of it is that there's a lot of competition in the cannabis market. It is a highly fragmented market. There's a ton of consumer choice. And because of all that competition, you just... If you want to sell top shelf cannabis for a high price, you really, really have to have that weed. It has to be dialed in. It has to be really, really good. You can't talk about cannabis prices as like one monolithic thing, right?

There's like cannabis flower or bud. There's pre-rolled joints. There's beverages, edibles, vapes, oils, tinctures. But the biggest category is flower. And in that category, there's just so much on the market. It's a kind of classic commodities issue. What happens to the price of something when you have a ton of it? Well, the price of it goes down, right? If there's a glut of oil, the price of oil goes down. If there's a shortage of oil, the price of oil goes up.

And that's kind of like the macro thing that's happening. Another thing is that these companies that were betting that they could grow a ton of cannabis and sell it, they grew a ton of cannabis before legalization. They couldn't sell it fast enough. And cannabis doesn't last forever. It's a plant, right? It's a plant that gets dried and cured. And when you have it sitting around on the shelf for like a year, it becomes less attractive

to consumers. And then it has to be discounted to get it to sell. People are willing to buy kind of like old dry weed if it's really cheap, but they're not willing to spend top dollar for it. And then do you think ultimately that the industry misread the demand, I guess is the other question that I know you're kind of getting at before. I don't have a specific projection to refer to, but I think that probably a lot of these companies did misread. I think they probably misestimated, A, how much of the market they could capture in terms of getting people to change their buying habits away from the black market, at least immediately. And we are for sure, it's happening.

People are definitely 100%. I'm convinced if you look at the numbers, the monthly cannabis retail sales numbers that Statistics Canada tracks, people are definitely buying more cannabis from the legal market over time. But there's still a significant black market. We don't know how much. from the legal market over time. But there's still a significant black market. We don't know how much. And it's going to take,

I think it's going to take a long time to get to the point where people no longer buy illegal cannabis. And I also think that the companies probably made mistakes in estimating how much of the market they would be able to capture. Right. Like fair for me to say,

no company, two companies have emerged as kind of like the Coke of Canadian weed. Yeah. Oh, 100%. It's not like, I don't know, the smartphone market where Apple and Google are the two huge players. And between them, they control so much of the market, right? No one is really capturing an enormous market share here. I mean, there are definitely companies that are performing well.

You know, that's true. But like, yeah, I don't have a great figure off the top of my head, but I really doubt that any one company controls more than like 8% of the market. Yeah, small. And so the ones that are doing well, like what are they doing right? I think that the companies that are doing well right now have found niches, just very specific areas where they're performing really well. They've done really smart consumer research where they can find out like, okay, here's a slice of the market where people are not having their needs met. We can fill that in.

And I also think that they are controlling their costs. That's a big one. If you're not selling enough cannabis and you're growing way too much cannabis, these greenhouses cost a lot of money to own and operate. And you can't just sit around and have all this unused capacity. It's just devastating to a company, right? And we can see that at Canopy, right? So the quarterly loss that they just reported when they announced these cuts, they reported a $267 million quarterly net loss. The quarter before that, the net loss was $232 million. The quarter before that was a net loss of almost $2.1 billion. You mentioned that some of these companies have found like a niche, right? Which is something I wanted to ask you about. Are there like certain products that are doing better than expected right like is is like is the drink

market taking off in a way that people thought that it it wouldn't maybe no but it's not okay okay yeah like what are what are the kids buying which i guess is another way for me to put this question uh the cannabis beverage market and i'm i'm glad you brought it up because like as it happens canopy bet very heavily on on cannabis beverages um and the the market data doesn't lie you know like i i have access to to cannabis retail sales figures that like show what brands are selling and don't and like not beverage sales are not really fantastic, but other categories have like definitely proven really surprising. I mean, just like plain old cannabis flower, cannabis bud, uh, is still, is still King. People just love to buy weed.

Huh? Pre-rolled joints. Canadians love pre-rolled joints. Pre-rolled joints. Who really? Okay. What about like gummies? Um, yeah, you know, edible sales,

edible sales have been, I think the industry would probably argue that they are underperforming where they could be if regulations were eased. You know, like I think the important thing to keep in mind when we're thinking about how the government regulated cannabis, the purpose of the cannabis legalization law was not to create a thriving cannabis industry. It was to protect health and safety. And it was, you know, the secondary goal was to eliminate or at least reduce the illicit market. One of the key public safety concerns

that the government identified were concerns around edibles and, you know, correctly so, concerns that kids would get into them and they'd look like candy and, you know, bad things would happen, which is certainly something that has happened. You know, we see stories about it happening, particularly in relation to illicit cannabis edibles. I hear stories about this in the United States. And so one of the key regulatory decisions the government made around cannabis edibles. I hear stories about this in the United States. And so one of the key regulatory decisions the government made around cannabis edibles was to limit their potency

so that they can't have more than 10 milligrams of THC per package. Now, some companies have found a way to get around that, and the government is kind of in the process of cracking down on that right now. But in the meantime, we have the situation where cannabis edibles, legal cannabis edibles are, you know, for some consumers, again, those like heavy consumers, the legal edibles might be less potent than they want because of that potency restriction. And that is something that I know the industry is interested in having the government review. I kind of think that might take a while to get to that point,

but yeah. So as a result, you know, I hear arguments from the industry that cannabis edibles could be performing better. But yeah, just, just like raw weed,

pre-rolled joints, vape pens. Canadians really love vape pens. One interesting category that I've been, I'm actually, I'm writing a story about it right now, is pre-ground marijuana. So you don't grind it up yourself. It kind of comes and it's already shredded up. This is kind of like a deep value product. But it turns out that there are a lot of people who are really into it. product. But it turns out that there are a lot of people who are really into it.

And so I guess just to sum up basically what you just said, it's not that we're seeing a collapse of the cannabis industry in this country, right? What do you think it's actually going to look like in the future? Has this bubble already popped and are we starting to see a correction or is there more to come? Like, how do you see this moving forward? Yeah. I mean, the bubble among the biggest publicly traded cannabis companies popped a few years ago. Yeah, for sure. Actually, what is it?

2023? Yeah. Like it popped. It popped like three years ago. Maybe actually in 2019, I should say it started popping. So a lot of people lost their shirts. Yeah, for sure. And here's the thing.

Because of that, these companies made headlines because the share values of those companies plummeted and they're not worth as much as they used to be. There is this perception among the public, I think, in my opinion, that the cannabis industry has collapsed or is collapsing. I don't actually think that's true. I think that definitely some of those publicly traded companies are in big trouble. A lot of them have already been cutting back. They've already taken their medicine and they're trying to rejigger things so that they can get on a good footing again. But there's a lot of smaller companies that the public doesn't hear about. There are micro producers who are, you know, operate that the government is licensed where it's, you know, sometimes like one or two people just doing it. We're talking about small privately held companies and, you know, they are finding success. And there are several, I think I mentioned

this earlier. There are several, several publicly I mentioned this earlier, there are several public-readed companies that are profitable. They're not insanely profitable. They're not like Apple or anything like that, where they're pumping out billions in net profit per quarter, but they're not losing money. So yeah, I mean, in terms of to finally get around to answering your question, I think that we're seeing winners and losers in this market. I expect to see further consolidation and mergers and acquisitions and further cuts

in the year to come. The black market definitely is alive and well in some places more than others. I take my dog out for a walk and I see signs for illegal cannabis delivery services. It's not like the cops are cracking down on that, apparently, if they feel emboldened to put posters out for their business. But yeah, it's a tough industry, but there are some companies that are succeeding. Okay. Solomon, this was really interesting and also super fun. So thank you very much for coming by. Yeah, it's always my pleasure, Jamie.

Thanks for having me. All right, that is all for today. I'm Jamie Poisson. Thanks so much for listening. Talk to you tomorrow.