An Aurora worker sorts marijuana plants at the Aurora Sky facility in Edmonton on May 23, 2018.JASON FRANSON/The Globe and Mail
Job losses and facility closings will persist in the Canadian cannabis industry for the next few quarters as long as companies struggle to cultivate and retain their customer base, industry analysts believe.
The warnings come ahead of earnings reports from two major cannabis companies – Aurora Cannabis Inc. and Tilray Inc. – over the next 10 days. Last week, both companies separately announced they were shutting production facilities and cutting jobs.
Edmonton-based Aurora said 8 per cent of its work force will be affected by the upcoming closing of Aurora Polaris, a 300,000-square-foot facility once touted as the company’s “centre of excellence” for “high-margin” production of cannabis derivative products such as edibles. Tilray too – as part of a cost-cutting exercise since its merger this spring with Aphria Inc. – announced it will shut down an indoor growing facility in Nanaimo, B.C., a 60,000-square-foot space that was designed to produce pot primarily for the medical market.
“The underlying theme in this whole business has been fierce, unrelenting competition. If you’re not on your game, you can’t distinguish your product and you don’t have the right cost structure, you’re going to be roadkill,” said Chris Damas, a long-time cannabis analyst and now independent consultant for the industry.
Major cannabis producers have been retrenching workers for almost 18 months now. Aurora laid off well over a third of its staff, or almost 1,000 employees in 2020. Tilray embarked on job-cutting measures last year, laying off more than 15 per cent of its work force before the merger with Aphria. Canopy Growth Corp. also went through two major layoff rounds over the course of 2020 and 2021, while shutting down five production facilities.
Aurora’s situation is particularly dire, analysts say. Unlike competitors of its size such as Canopy Growth Corp. and The Cronos Group, it has not received hefty investments from large alcohol or tobacco companies to sustain a strong cash position in the face of declining revenues. (Constellation Brands owns almost 40 per cent of Canopy, while Altria Group owns roughly 45 per cent of Cronos.)
“There is no success on any front for them. Not one product form, not one category,” said Andrew Carter, an analyst with Stifel Financial Inc.
Mr. Carter’s research, using data from cannabis intelligence provider Headset, suggests that Aurora has been the poorest performer in terms of pot sales to retailers, suffering a 65-per-cent decline in sales in August, compared to August, 2020. Canopy Growth, by comparison, saw its sales decline by 38 per cent in the same period. Tilray’s sales were down 17 per cent.
The closing of Aurora Polaris – which cost the company an estimated $50-million to construct and opened in February, 2019 – is warranted and unsurprising, Mr. Carter said.
“I suppose layoffs are necessary. But it doesn’t fix the fundamental problem for Aurora, which is ‘Why don’t consumers want to buy your product?’” he said.
There is no clear answer. The company’s most popular brand, San Rafael, was a hit in the first year following legalization. But as more premium cannabis brands entered the market, competition increased, leaving the company to focus more on sales of its derivative products – vape pens and edibles. That market segment too was rife with competitors, and Aurora’s products did not resonate with consumers enough to justify such expensive production facilities.
At the height of the cannabis industry boom in Canada, Aurora owned eight facilities across the country, and a 1,000,000-square-foot production space in Odense, Denmark, spending hundreds of millions of dollars on leasing costs and renovations to design the greenhouses for cannabis cultivation. But over the past 18 months, the company’s business has been whittled down to just two domestic production centres, in Edmonton and Bradford, Ont.
Some analysts predict that Aurora Sky, a state-of-the-art indoor growing facility next to the Edmonton International Airport, which cost an estimated $150-million to construct and renovate, could also shut its doors if the company’s sales do not pick up.
According to Mr. Damas, the facility closings for Aurora reflect the fact that the company failed not only in capturing the value segment of pot sales – sales of cheaper cannabis – but also the derivatives market. “They have about a quarter of the chocolate market in Ontario. But that’s still not enough,” he added.
Tilray’s situation is slightly different. While Aurora was forced to downsize because it simply had to conserve cash, analysts say Tilray could potentially operate at the status quo, but has instead chosen to streamline its operations in light of uncertain demand for its products and a growing focus on its American and international operations.
Prior to its merger with Aphria, Tilray had almost 1,000,000 square feet of cultivation space in Canada, mostly concentrated at its High Park Farms property in Enniskillen, Ont. That facility was shut immediately following the merger. Only one of Tilray’s old production facilities in London, Ont., is still part of the merged company, and it functions as a distribution centre, not a cultivation hub.
“Tilray is not necessarily overspending right now,” Mr. Carter said.
He pointed out that two massive Aphria production facilities – Aphria One and Aphria Diamond – were more than enough to sustain the company’s supply, thus it made sense that Tilray would embark on downsizing.
In its most recent earnings, chief executive officer Irwin Simon said he believed Tilray could earn up to $4-billion in revenue by the end of 2024, with roughly $1-billion coming from its Canadian operations. Its current annual revenue is roughly $620-million. But in a note to clients, Tamy Chen, an analyst with Bank of Montreal, called Mr. Simon’s predictions “lofty” and “underpinned by many bullish assumptions.”
Mr. Damas, the cannabis consultant, called the current state of the industry “Darwinist in nature.”
“It’s survival of the fittest. So once you get labelled with a bad reputation, be it broken promises to shareholders or low-quality product, it’s hard to change consumers’ minds.”
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