A major supply problem emerged in Canada with the launch of legal recreational marijuana, which may cripple brands that are unable to effectively serve their customers.
- In U.S. states where recreational marijuana is legal, an oversupply problem has emerged. It is pushing down prices and causing producers and retailers to feel the constraints of being limited to single state production and distribution.
- In Canada, before recreational marijuana became legal, concerns about oversupply were already widely discussed in business news coverage of the coming legalization.
- However, since recreational marijuana became legal last year, Canada has been hit with an undersupply issue that is particularly troubling to medical marijuana users.
- Retailers are currently grappling with how to manage these undersupply issues.
Oversupply in Oregon
Oregon's cannabis industry is noted for an exceptional number of producers and retailers that has grown beyond initial forecasts. While that may seem like good news for advocates of legal marijuana, it led to an oversupply of marijuana by the spring of 2018. A bumper crop year also contributed to the problem and now producers and retailers are struggling with what to do with the extra product even as prices are dropping.
In addition, though legalizing marijuana is intended, in part, to reduce the black market, too much pot on hand means that the black market remains an outlet for unethical producers with the excess believed to be traveling beyond state lines.
Comparing to Canada’s situation post-legalization
The problem of oversupply in the U.S. is not confined to Oregon—the state is a good example of what can happen as a new industry is born. Canada's situation is rather different given that marijuana is legal nationwide. In addition, Canadian provinces set stricter limits on licensing than some U.S. states like Oregon, leading to a more modest number of producers and outlets and a higher value for licenses to produce or sell at retail. In addition, the Canadian government is actively involved in the process with government buyers in some provinces acting as middlemen between producers and retailers.
Leading up to legalization in October, Canadian marijuana growers attempted to increase their production to meet the expected demand. Concerns about oversupply led business writers and stock analysts to wring their hands a bit. But, as CannaRoyalty strategist and legal counsel Michael Garbuz pointed out, oversupply would push down prices but the best producers and retailers could still do well by building strong brands for their products and outlets.
Undersupply in Canada
However, as in many U.S. states when recreational marijuana first became legal, Canadian provinces faced an initial undersupply as retail outlets responded to the demands of consumers. The undersupply problem is hitting medical marijuana users particularly hard.
Many of these users say they did not have these problems prior to the legalization of recreational pot. Now, they are having to make do with substitutes for their preferred brands and products. Or worse, they just do without and suffer from medical conditions for which cannabis was providing the best treatment.
In addition, lack of communication from producers and government agencies has left many medical marijuana users wondering if their needs will continue to go unmet.
At least one producer is attempting to go above and beyond in addressing the marijuana shortage. Aurora Cannabis Inc (TO:ACB), one of the true powerhouses of the emerging cannabis industry, is making bold statements that, given their history, they seem likely to be able to back up.
In November last year, Aurora CEO Terry Booth initially downplayed the shortage and said that the company was organizing its supply for monthly releases of product to those with which it has supply agreements. Yet that approach was clearly unable to address the undersupply problem hitting the national as a whole.
Recently in February, Booth related during a earnings call that he "'loses sleep' over the industry’s ability to supply the global cannabis market." Though that statement might be taken as a marketing maneuver, it is clear that Aurora Cannabis is leading the effort to ramp up production. Investors may not be overly enthused at the response in the short-term. However, Aurora's dominance as a Canadian producer has led them to fully commit to resolving their internal issues and getting ahead of other producers in addressing supply.
That means that retail companies, such as Choom Holdings Inc (SNX:CHOO), with strong ties to Aurora, will be able to move ahead much more quickly than retail outlets with other suppliers. Choom is in somewhat of a different — and advantageous— position than most retail companies in that they are currently building out a portfolio of retail opportunities and gathering as many of the quite limited provincial licenses as they are able. This has been a successful strategy for Choom to date and also puts it in a position where its brand is not being associated on a daily basis with undersupply by customers. When Choom’s retail opportunities do come online, they will be backed by Aurora, one of the biggest leaders in the cannabis industry. Aurora itself placed a $20 million investment on Choom.
Canada's undersupply problem will not last forever. But brands will be built and brands will be undermined in these early years. Those situated to best serve their customers like Choom and Aurora will create a foundation for long-term success.