Author: Anne-Marie Fischer

Early insights reveal out-of-stocks remain elevated in Canada’s first 3 weeks of legalization

An analysis of the e-commerce platforms of Alberta, British Columbia, New Brunswick, and Newfoundland & Labrador, represented approximately 65% of the Canadian population, shows that Canadians are taking full advantage of the products available from their provincial retailers.  

The report released by Cowen & Co.’s  Vivien Azer focused on the issue of out-of-stock rates as Canada falls deeper into its market shortage following legalization on October 17 while providing an up-to-date profile on the who and what of legal cannabis from Health Canada.  

The Out-of-Stock Issue

Out-of-stock levels across suppliers show that the product shortage is nothing to scoff at, as supply fell far short of the demand for Canadians accessing legal cannabis immediately after legalization took effect.

Overall, out-of-stock levels remain flat from the prior week at 57%. For Canopy Growth (NYSE: CGC), out-of-stock rates fell to 54% from 65% in the prior week. Tilray’s (TLRY) out-of-stock rates remained flat. Aphria (APHA), which is still recovering from dips in its inventory levels, continues to see out-of-stock rates climb.

Canopy and Tilray Rate an Outperform

Canopy Growth, which had the second highest number of products offered (169 SKUs), rated an outperform with an C$82 price target.

Tilray’s product SKU data was not able to be obtained because the company doesn’t have supply agreements with three of the four analyzed provinces. Tilray also rated an outperform at a C$172 price target.

Market Leading Products

Azer notes that in the provinces examined, loose leaf cannabis is making up 80% SKUs noting that this is likely due to the unavailability of other products like concentrates on the legal market. High-THC flower, made of 20% THC or higher, and oil-based products measured at 20 mg/ml, are proving to be popular products for both offerings and consumer take up. While the purchase of flower (i.e. bud) is most common, pre-rolls are also proving popular with the out-of-stock levels increasing for these particular products; out-of-stock rates for pre-rolls outweigh those of flower.

With the rise in popularity of CBD, out-of-stocks for these products rose to 100%; CBD-focused and CBD-balanced products were sold out at 67% and 61% respectively.

The report noted that oils and capsules make up only 8% of SKUs on the market with these out-of-stock rates climbing faster than other categories.

Capsules carry the highest out of stock rates 75%, but this data is based on a small sample.

The Price Factor

Azer notes that 70% of flower SKUs are priced at $11, while the data is showing that people are willing to pay more for premium pre-rolls, at the equivalent of $10 per gram. Products in the higher end price range (up to $20/pre-roll) are proving to be bigger sellers than those of a lower price category (as low as $12/pre-roll).

As Canada adjusts through its growing pains, we can expect firms like Cowen & Co. to keep a close eye on the who, what, and how much of Canadian cannabis.

Profile of Canadian Cannabis Users

Azer’s report revealed some interesting statistics from Health Canada about cannabis use amongst Canadians. It’s showing a decline in use among 15-19-year-olds by 7%, while use among 20-24 and 25+ is increasing. At the same time, alcohol use among these latter two groups is decreasing.

Females are trailing men at 11% in reporting instances of cannabis use, in comparison to 18% of men, but that gap is beginning to close as more women turn to cannabis. Interestingly, alcohol use among women is on the increase along with a reported increase in women using cannabis.

More incidences of cannabis use were reported in British Columbia over any province; with Ontario falling slightly under the provincial average, and Quebec reporting the lowest incidences of cannabis use in the country.

As the clock rolled onto 12:00 am in Newfoundland, eager cannabis users lined up around city blocks as the first legal cannabis was sold within the country of Canada on legalization day, October 17.

Cannabis is now legal for production, sale, consumption and personal growing in Canada, but early critics of Canada’s legalization warn that we should be wary of the “green rush”.

Rollercoaster Stocks

Shares of Canadian companies Canopy Growth (CGC), Cronos (CRON), and Tilray (TLRY) have been soaring all year, but saw a plunge on Wednesday with the turn of legalization, causing critics to warn that the hype doesn’t meet the promise for profits.

Other stocks such as Aurora Cannabis (ACBFF), and Aphria (APHQF) took a plunge in light of recent news that big consumer products like Coca-Cola and Marlboro respectively have been poking their noses into cannabis looking to cash in.

Despite estimates that Canada’s recreational market could be worth $4.3 billion within the first year, critics scoff at the idea that the cannabis boom is akin to the dot-com boom of previous decades. Paul Rosen, CEO of Cronos joked to CNN earlier this week that not every cannabis company will become the Google of cannabis; with some having to settle for Ask Jeeves status.

Customer Feedback on Pricing

“An eighth cost me $56!,” said Emily, who logged on early on Wednesday to the Ontario Cannabis Store’s online shop. “The prices alone may keep me in the grey market”. Another Ontario consumer purchased 2 (yes, only two!) pre-rolled joints for $30. While there is certainly a privilege of purchasing legal cannabis, the high pricing and Harmonized Sales Taxes make a “dime bag” feel more like a hefty investment.

Of course, one of the goals of The Cannabis Act is to stamp out the black market and ensure that “keeps profits away from organized crime”, as Prime Minister Justin Trudeau puts it.

It was recently announced to Access to Cannabis for Medical Purposes (ACMPR) patients that prices for medical cannabis would go up by $1 per gram (or the equivalent of 10% of the purchase price) and would be subject to higher taxation. Licensed Producers like Emblem are working to resolve these issues to make cannabis remain accessible to ACMPR patients.

Product Shortages

Winnipeg’s Delta 9 cannabis store reported that within the first minute of online sales, there were 100 orders and that sales for the day totaled $50,000. Products sold out within the first few hours.

“[All cannabis is] all sort of spoken for across the entire country,” said Living Skies Cannabis, a Saskatchewan-based retailer who was ready to open their doors, but had no inventory to offer customers.

The Alberta Liquor and Gaming Commission’s website was so overloaded that it failed to load for some consumers, with 11,000 customers in the queue waiting to purchase cannabis at one time. The platform had to tweet that they’d be back up and running soon.

For the largest consumer province in Canada, Ontario Cannabis Stores’ website ran smoothly, but consumers saw the availability of products dwindle throughout the day.

It was estimated just days before legalization that Canada’s cannabis supply could meet only 30-60% of demand, causing the black and grey markets to continue to thrive as people continue to get cannabis from their pre-legalization sources.

Time to Iron out the Kinks

We’ve gotten through the first day of legal cannabis in Canada. This is the dawning of a new Canada, where certain privileges are granted, while others are taken away. It may be a while before we can properly assess the social and economic impact of legal cannabis in Canada, but at least this is a start.