Cannabis giants fail to lift sales even after big buying spree

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Some of the largest cannabis companies have spent much of 2021 acquiring smaller pot producers for hundreds of millions of dollars in an attempt to boost revenue and expand market share, but more often than not, these deals have failed to accomplish either of those goals.

Indeed, 2021 was the year of consolidation in the Canadian industry – Aphria Inc. and Tilray Inc. merged to form the largest pot company in Canada by revenue, Quebec company Hexo Corp. spent more than $700-million buying three cannabis producers (Zenabis Global, 48North Cannabis Corp. and Redecan), and Canopy Growth Corp. scooped up craft producers Ace Valley and The Supreme Cannabis Co. for about $485-million.

Months later and despite the acquisitions, some of these cannabis giants are still seeing declining revenue and fluctuating demand for their products, forcing them to cut jobs and close facilities that they had just acquired.

“I don’t think any of these companies have solved the puzzle yet of how to build and maintain market share,” said Aaron Salz, principal and founder of Toronto-based Stoic Advisory Inc., a boutique investment firm focused primarily on cannabis deals. “Some of these large companies are just making bets, in desperation almost, to buy producers that have gained a consumer base very quickly. But all of a sudden, someone comes along with a better product and consumers just move on,” he added.

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The latest earnings report from Canopy Growth, which is based in Smiths Falls, Ont., showed revenue steadily shrinking for the third consecutive quarter. The company generated $131-million in revenue for the three months ending September, 2021, compared with $136-million for the quarter prior, $148-million for the quarter ending March 31, 2021, and $152-million in the three months ending December, 2020. This decline was in spite of new revenue generated from sales of Ace Valley and Supreme products.

Canopy acquired Ace Valley in April for $51.8-million, saying at the time that Ace Valley had carved out a “leading position” among millennial and Gen-Z consumers and would “unlock revenue growth opportunities.” The Toronto-based craft cannabis brand sells prerolled cannabis, vape pens and cannabis gummies – product lines that Canopy also sells through its Tweed brand. Canopy, at the time of the acquisition, had already begun removing low-performing items from its roster and was seeking to add “premium” products to increase sales.

But data from the cannabis intelligence company Headset show that in the three months ending Sept. 30, Canopy’s market share in the Canadian recreational cannabis market declined from 8.7 per cent to 8.2 per cent. Ace Valley’s own market share declined by 8 per cent.

A similar scenario played out with Canopy’s acquisition of Supreme, which closed in June. Canopy paid $435-million to buy Supreme, particularly because of its craft cannabis brand 7ACRES, which it said in a news release at the time had a “loyal” customer following. Canopy predicted that owning Supreme’s portfolio of brands would push its overall market share in the Canadian recreational market to 18 per cent.

Headset data, however, show that the market share of Supreme has also shrunk, by roughly 9 per cent, over the past three months.

“There are challenges to integration,” said Rami Chalabi, who leads the cannabis group at Bay Street law firm McCarthy Tetreault LLP. “If you have eight to nine different brands, it is hard to manage that and make sure each brand is getting the attention it needs.”

Hexo acquired 48North, a wellness-focused cannabis brand, for about $50-million in September, but barely eight weeks later announced it would shut down 48North’s facilities (both were in Ontario), leaving hundreds of workers without jobs. Hexo announced the closing of one of Zenabis’s production facilities after acquiring the company for $235-million in June – in the face of mounting losses, burgeoning debt and stagnant revenue growth.

Hexo’s market share in the Canadian recreational space has remained relatively consistent since these acquisitions, but that was effectively because its own products gained traction among consumers, making up for waning sales of Zenabis and 48North products.

Mr. Chalabi told The Globe and Mail it is not uncommon for larger licensed producers to acquire smaller ones and then shut down their growing facilities if they aren’t essential to the brand to consolidate production in fewer locations. “Right now, a lot of [acquisitions] are driven by companies trying to find the best brands to increase market share,” he said.

The problem is that consumer preferences change quickly, Mr. Salz said.

The Canadian cannabis market is without a doubt cluttered. It has more than 1,600 unique products in different forms (vapes, gels, edibles, dried flower), according to data from the Ontario Cannabis Store. Health Canada has to date issued 794 licences to grow, process and sell cannabis.

“Around 40 per cent of the market are smaller producers,” Mr. Salz said. “There are also new products, new formulations entering the picture every day. Many of these large companies have created the story that they are market leaders, but the fact is that they are losing market share every day, so they’re trying to keep it together by buying.”

But while some of the acquisitions might not have increased revenue in the short run, they could do so eventually, said Andrew Wilder, a partner at Torkin Manes and the co-chair of the firm’s cannabis practice group.

In October, Canopy announced it would buy the Colorado-based edibles manufacturer Wana Brands for US$298-million, and in August, Tilray bought a 21-per-cent stake in California-based cannabis retailer MedMen for $200-million – closing both these deals is contingent upon federal legalization of cannabis in the United States.

“I am not sure I would describe these deals as bad,” Mr. Wilder said. “Companies were motivated to buy for two reasons: to build brand awareness, which is important, and to find a way to enter the American market.”

Some acquisitions seem to have panned out. In April, Organigram Holdings paid $22-million to acquire a tiny edibles manufacturer, The Edibles & Infusions Corp. The company is set to report earnings on Nov. 23, but chief executive Beena Goldenberg told The Globe that adding gummies to its portfolio has helped drive overall sales. “That was a tactical acquisition for us, and we were able to build a significant position in that market segment,” she said.

When asked if Organigram will join the acquisition spree to attempt to cement market share in the hyper-competitive cannabis market, Ms. Goldenberg said the ideal type of acquisition is filling a segment gap or a regional gap that will drive true incremental value. “But it’s tough,” she said. “It’s a hard industry to keep going in, and not everyone is going to make it.”

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