As product destruction from Canadian cannabis operators continues to climb to new heights, how should investors perceive this mounting waste?
New figures from Health Canada, first reported by MJBizDaily, show Canadian cannabis producers destroyed 425 million grams of licensed cannabis last year. On top of that, over 7 million packaged products were destroyed.
The record number of cannabis products destroyed in 2021 was even more than what was sold in the first year of adult-use legalization in Canada, as per the report.
The waste is another sign of the oversaturation of branded products facing the adult-use Canadian market.
“Since 2018, almost 900 million grams of unpackaged dried cannabis has been destroyed by licensed producers (LPs) because of overproduction and quality issues,” the report indicates.
As brands continue to lag when it comes to customer retention, should investors begin prioritizing product writedowns when evaluating cannabis picks?
Cannabis waste shouldn’t surprise investors, expert says
According to a financial advisor who closely monitors the cannabis stock market, no one should be surprised at the shocking amount of product lost in Canada.
“I don't think any investors are looking at this and are dumbfounded,” Nawan Butt, portfolio manager with Purpose Investments, told the Investing News Network (INN).
For the investment expert, the issue shows the mistakes of the past are coming back to haunt the industry.
“It all comes down to these very large LPs that had huge balance sheets available to them — they could just go out there, buy the biggest greenhouses and start churning as much product as they could, and then start buying up competitors and warehousing their products as well,” he said.
This heavy prioritization on growth capacity as a way to differentiate from the competition has now led to the serious cannabis waste produced in Canada, Butt said.
“It all comes down to just bad planning and exuberance,” the Purpose Investments portfolio manager told INN.
Product destruction another sign of struggling industry in Canada
After betting on bigger production capacities and larger facilities, many Canadian cannabis companies are now having to step back. Several have had to reduce their operations, lay off staff and sell previously touted assets.
Aside from that, as a group these companies are broadly suffering from poorer market valuations as interest shifts to US operators; for the most part, Canadian firms have limited opportunities when pursuing the US market itself.
“We're very concerned that ultimately, some of these names can disappear. There might be bankruptcies,” Charles Taerk, president and CEO of Faircourt Asset Management, previously told INN.
Companies don't understand Canadian cannabis consumers
Butt said cannabis producers haven't reined in their expectations for Canada's total addressable market, and that’s resulted in an inability to understand who consumers are, why they consume and how much they will consume.
“It's bad forecasting,” he said, adding that economists value the Canadian market at C$5 billion to C$8 billion.
“These companies thought that they would make a profit by just gaining market share, taking the losses where they could, making sure that their products were everywhere … but what they failed to do was, again, identify who the consumer is,” he explained to INN.
From the launch of adult-use legalization in 2018, Butt said, Canadian LPs were gunning for the high end in terms of production expectations.
“We see non-forecasting in a lot of small industries where there isn't a lot of research around the consumer and what the terminal capacity of the consumer is,” he said. “That's what this industry has fallen prey to.”
Cannabis clean-up act to follow?
When asked if he sees cannabis companies taking advantage of these product losses to prioritize turnaround strategies for investors, Butt said that is already the plan for Canadian operators, in a way.
“(Canadian LPs are) talking about lowering their losses, they're talking about how to improve metrics, how to improve wastage and really how to get to profitability,” Butt said.
In terms of priorities for Canadian cannabis producers, the financial advisor told INN he sees them chasing after market share. “I think a lot of these companies are now at the brink of failure, and what they need to prove to their investors is if they can gain or keep market share,” he said.
Investor takeaway
The Canadian cannabis industry has made clear mistakes that are now coming home to roost and making life increasingly difficult for the market as a whole.
The recent damning figures from Health Canada drive home the amount of waste the industry has produced.
“This industry is still a long way from equilibrium, and we're going to see more downside in this industry before we see upside,” Butt said.
Don’t forget to follow us @INN_Cannabis for real-time news updates!
Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
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