Canada | News

Current state of the cannabis industry, nine months after legalization

We can expect more consolidation as the industry matures, say experts

A Facebook IconFacebook A Twitter IconTwitter A Linkedin IconLinkedin An Email IconEmail

A customer using a tablet in store to purchase cannabis at a Nova Scotia Liquor Corp. storeAlthough all provinces include an option for online sales, retail systems vary across the country (Getty Images/Bloomberg)

Canada’s federal Cannabis Act came into effect on October 17, 2018. And on December 20, 2019, edible products containing cannabis will also be legalized.

Here’s an overview of where the industry stands right now. 

1) ALMOST 200 LICENSED COMPANIES

As of July 2019, Health Canada listed a total of 189 licensed cultivators, processors and sellers of cannabis. Currently, the largest cannabis company in the world per market capitalization is Ontario-based Canopy Growth Corporation (net revenue Q3 FY2019: CAD$83 million). The second-largest company is Edmonton-based Aurora Cannabis (net revenue Q3 FY2019): CAD$54.2 million.

2) RETAIL ROLLOUT STILL A DEVELOPING STORY

Although all provinces include an option for online sales, retail systems vary across the country. Manitoba, for example, has 22 licensed cannabis stores. And in Ontario, the government decided to use a lottery system to choose the first 25 private operators to open on April 1, 2019. However, almost half were fined for not being able to open on time. 

Now the government plans to hold a lottery on Aug. 20 for 42 private stores, with an additional eight allocated to First Nations reserves. This time, there are strict capitalization requirements for entrants.

3) FIGURES ARE UP, BUT IT’S TOO EARLY TO MAKE PREDICTIONS

Perhaps not surprisingly, sales, consumption and tax revenue all increased after the act came into effect. And Ottawa and the provinces made $186 million from various taxes on cannabis from October 2018 to March 31, 2019. 

However, experts caution against making any assumptions based on these early figures. As Armand Capisciolto, national accounting standards partner at BDO Canada, puts it, “I don’t think we’re going to have a true sense of the volume of taxes generated by the industry until the retail situation in each province is sorted.”

4) FROM CULTIVATION TO VALUE ADDED

While Canada took the lead in funding cultivation over the past few years, producers are starting to assess whether cultivation is better placed within lower-cost jurisdictions such as Colombia, says Maruf Raza, a partner and national director of public companies for MNP LLP.

Also, once edibles become legal, the non-combustible market could potentially become as significant as the market for combustible cannabis products over time—partly because many consumers have suggested they would rather use cannabis in other products (such as wellness products), than smoke it.

As Raza explains, “This means a lot of the new growth will be coming from companies that won’t be cultivating at all. They will be involved in extraction or distribution or some other part of the value chain.” 

5) SIGNS OF CONSOLIDATION ARE SHOWING

According to Raza, we’re already seeing signs of consolidation in the sector.

“For the past couple of years, it was very easy for cannabis companies in Canada to raise money—you could more or less write your own cheque,” he says. “Now that some of the same funding is no longer readily available, we are going to see much more M&A [mergers and acquisitions]. Also, for strategic reasons, some of the mid-sized operators may come together to compete with some of the bigger players.”

6) ALL EYES ARE ON EUROPE

Worldwide, jurisdictions that are shaping up to become cultivation hubs—such as Colombia or certain countries in southern Africa—are looking to Europe as their main market. 

As Raza points out, “Europe is still a work in progress in terms of legislation. Each country is coming on at their own speed. There is still a lot of discussion in terms of how much localized cultivation there will be within the EU.” 

As a result, there is a rush to be able to supply into the European market, particularly Germany, and companies are moving ahead with full EU-GMP certification. 

CANNABIS AND ACCOUNTING

Attend CPA Canada’s webinar on September 26, 2019, to learn about the current state of the industry and some of the related accounting implications.