While it is unclear what percentage of the unfinished inventory consists of dried bud versus cannabis trim (leaves from the plant that can be used for extract products) or even potentially other plant waste, the rapid growth in the metric has some analysts concerned.
“If a large proportion of that 328,000 kilograms is dried bud, that’s going to be a big problem for the LPs,” said Matt Bottomley, a cannabis analyst at Canaccord Genuity Corp., a week before a slew of earnings reports were expected from producers including Canopy Growth Corp., Tilray Inc. and Aurora Cannabis Inc.
“I suspect it’ll be a race to the bottom with price because everyone now has more than enough supply,” he said.
The inventory build-up marks a sharp turn for an industry that struggled with a shortage of product in the early days of legalization, just a year ago. But a limited retail network and the exponential increase in the amount of cultivation space in use across the country have allowed stockpiles to balloon rapidly.
image: https://financialpostcom.files.wordpress.com/2019/11/cannabis-inventories-1-1.png?w=640&h=496
Producers have already started lowering prices, a move that is bound to affect the margins of retailers as well. Recently, Hexo Corp. began selling a new product line called Original Stash, priced at just $4.49 per gram, roughly 50 per cent lower than the average per gram price on the legal market.
Hexo also announced it was shutting down its Niagara greenhouse and suspending 200,000 square foot of licensed space for cultivation, firing 200 employees in the process.
“If you look historically, licensed producers typically get about 60 per cent wholesale pricing. So a gram of bud will go for $10 on retail, but LPs will get about $6.50 at the high end before paying excise taxes. That’s going to go down to 50-50 very soon,” Bottomley said.
Finished inventory held by provincial distributors and retailers (excluding products in the vaults of licensed producers) decreased by 2.3 per cent in August. On average, this inventory was 2.5 times sales for the month, a figure that is typical for the retail business.
“I’d rather know that I have two-and-a-half months of product available than nothing at all,” said Mark Goliger, CEO of Meta Growth (formerly National Access Cannabis Corp.), one of the largest cannabis retail chains in the country.
Recently, Canopy Growth had to take an $8-million revenue adjustment due to projected returns on its oil and gel-cap products, which it acknowledged had simply not been selling well.
Complicating the situation for both producers and retailers is that they haven’t quite pinned down what products and brands consumers like. Some of the larger producers, such as Canopy Growth, Aurora, and Organigram, successfully filled the market with product in the early months of legalization, but as more choice became available, demand for those products declined.
Bank of Montreal cannabis analyst Tamy Chen, who has in the past expressed concern about the growing inventory situation, pointed out in a recent note that provincial wholesalers are becoming more selective in their purchase orders to “ensure that in-store supply is better aligned with recreational consumer demand.”
Licensed producers will have to adjust their product SKUs accordingly, which could mean revenue headwinds for the next few quarters.
“There is no consistency at the moment, so it becomes very hard for us to forecast and plan because of the inconsistency of the availability of SKUs,”
said Goliger.
“The SKUs as they came into the provincial boards from rotating crops may have different characteristics than they did the last round, so something that might have been 18 per cent THC may only be 14 per cent THC. That’s a difficult challenge for us,” he added.
One of the potential avenues for provinces to manage the inventory problem, said Chen, is through returns.
“We have heard that limited warehouse capacity in Ontario and Alberta may have already resulted in product returns, with potentially more to come ahead of cannabis 2.0,” she said.
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good discussion on the Aurora boards along with someone posting an article why Aurora and others are not worried. good to follow what is going on as it will be telling as to this one too.