Cannabis Chronicles: Newfoundland Is A Model For All Of Canada

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Includes: APHA, CGC, CTST, EEVVF, EMHTF, LBLCF, OGRMF
by: Jonathan Cooper
Summary

All Atlantic Canadian provinces have had excellent cannabis launches.

New data from Newfoundland shows just how well the province has been performing.

Newfoundland's excellent cannabis results are thanks to a large store network including Canopy Growth and Loblaws private stores.

Newfoundland's strong results benefit Canopy Growth and Organigram, among others.

Note: All dollar figures herein are Canadian dollars.

Newfoundland is a top three province in cannabis sales per capita - and potentially the best.

Summary

In my Cannabis Chronicles articles (linked to below), I use real sales data to analyze the performance of the cannabis market and its implications for individual companies.

Subsequent to my previous article, I received data from Cannabis NL. They are the governmental cannabis distributor in the province of Newfoundland and Labrador (Newfoundland or NFLD, herein). Based on an analysis of that data, I find:

  • Newfoundland may have had the strongest cannabis sales/capita in December 2018, up from third in November 2018.
  • Newfoundland may be consuming about 4.0-6.6% of the cannabis consumed in Canada, despite including only 1.4% of Canadians.
  • Stores are extremely important. Newfoundland sold 97% of its cannabis in retail stores - similar to figures from New Brunswick.

The winners here are, basically, every company the sells cannabis in Newfoundland. The biggest winners, among Licensed Producers, are Organigram (OTCQX:OGRMF), which has a leading position in Atlantic Canada, and Canopy Growth (CGC), which owns and operates six retail stores in Newfoundland. This sales data will also benefit Loblaw (OTCPK:LBLCF), which owns and operates six retail stores in Newfoundland.

Newfoundland and Labrador: Exceptional Fourth Quarter Results

Some provinces release cannabis sales results prior to national data from Stats Canada. Three such provinces are Quebec, New Brunswick, and Prince Edward Island. I discussed their December - and even January - sales in "Cannabis Chronicles: Atlantic Canada Sales Flourish While Quebec Falters." During the research for that article, I also asked a few other provinces about their sales, inquiring if monthly or quarterly sales reports were available.

Newfoundland answered this request:

Good day [Jon],

We do not publish sales data reports on a monthly or quarterly basis. However, overall sales from Oct. 17 to Dec. 31, 2018 = $9.3 Million (or 1,022 KG).It is important to note that, with the exception of online sales (approximately 3% of total sales), these figures reflect the total retail value of product purchased from Licensed Producers (LP's) by Licensed Cannabis Retailers (LCR's) and not the retail sales generated by LCR's. Hope this helps.

Source: Message from Cannabis NL, Jan. 30, 2019

This is an analysis of this data.

Strong Sales Data

In their message, Newfoundland provided me with two data points:

  • Fourth quarter cannabis sales were $9.3 million.
  • Fourth quarter cannabis sales were 1,022 kilograms.

It isn't immediately clear if either figure is directly comparable (apples-to-apples) to published Stats Canada data. Notably, Newfoundland has a public/private structure with private stores and a public distributor and online stores. These figures, as noted by the province in their message, are the cannabis that has passed through the public distributor and is no longer in their possession - be it through online sales to a consumer or be it to a retail store. In the latter case, that cannabis may still be in store inventory or it may have been sold to consumers.

Because of this uncertainty, please take these figures as estimates.

Per Capita Sales: Strongest in Canada?

Atlantic Canada is dominating cannabis sales in Canada, as measured per capita

As of November figures, Newfoundland had the third-highest per capita cannabis sales in Canada, based on Stats Canada data. However, as I detailed in the last "Cannabis Chronicles," three provinces, including PEI and New Brunswick, have provided updated sales records past December. Among other things, PEI's per capita annualized sales rose to $110/person.

If these Newfoundland sales figures are comparable - that is, if they're the same figures as Newfoundland will supply Stats Canada - then Newfoundland would take PEI's crown as the best cannabis market in Canada in December.

During the first two months of cannabis sales, Newfoundland accrued $4.3 million in cannabis sales. Thus, Newfoundland may have accrued $5.0 million in cannabis sales in December, which would be a 90% increase over November sales.

(in $000s) Oct. 18 Nov. 18 Dec. 18* 2018*
Newfoundland and Labrador $1,708 $2,615 $4,977* $9,300*

Source: Author based on data from Stats Canada and the Government of Newfoundland and Labrador.

Converting this to per capita sales, we see that per capita sales would rise to $113/person, annualized:

Newfoundland is a top three province in cannabis sales per capita - and potentially the best.

Why could sales increase so much? This is a massive increase in Newfoundland sales in one month, which makes me skeptical that this data is apples-to-apples. We will not find out for sure until mid-February when Stats Canada updates their national sales data for December.

However, there is a reason that sales could increase this much: Store openings. In Newfoundland, 97% of cannabis is sold in retail stores. Today, Newfoundland has 24-25 retail cannabis stores. In October, however, Newfoundland had only 9 retail cannabis stores:

Newfoundland's first online cannabis shop is officially live, and 30 private store locations are set to open their doors - however, of those 30, only 9 will reportedly be open for business on legalization day.

Stores account for nearly all cannabis sales in the province. If the store count has increased by ~170% since October, it is at least plausible that sales would also rise sharply.

Sales by Weight: Oversized Market Share

Again, it isn't clear how apples-to-apples this data is. But I was told that Newfoundland sold 1,022 kilograms of cannabis in the fourth quarter, between online sales and shipments to retail stores.

We can compare this to published Stats Canada data for Canada as a whole. There are a few wrinkles here, at the end of this section, which is why I provide a range.

Q4/18 Cannabis NFLD % of Total Per Capita
Newfoundland 1,022 kg 1.9 g
Canada: Sales (in kg) 15,601 kg 6.6% 0.4 g
Canada: Inventory (in kg) 10,213 kg n/m n/m
Canada: Sales + Inventory (in kg) 25,814 kg 4.0% 0.7 g

Source: Author based on data from Stats Canada and the Government of Newfoundland and Labrador.

Based on Newfoundland's cannabis sales, I estimate that Newfoundland is consuming 4.0-6.6% of cannabis in Canada (likely closer to the bottom end of this range). For comparison, Newfoundland is home to 1.4% of Canadians.

During the fourth quarter, Newfoundland consumed 1.9 grams of cannabis per capita. This is much higher than Canadian consumption of 0.4-0.7 grams/capita, depending on which metric is used.

In short, Newfoundland's rollout of cannabis has been very successful so far - kudos to the Government of Newfoundland and Labrador for a much better-than-average rollout of legal, recreational cannabis.

Wrinkles: Stats Canada publishes two numbers - sales and provincial/non-LP inventory.

I believe that the figure provided by Newfoundland is a figure that would fall in between these two Stats Canada values. Here is why:

  • Stats Canada's sales refer to, I believe, sales to consumers. This would only include sales to consumers whereas Newfoundland's number also includes private store inventory.
  • Stats Canada's inventory includes provincial cannabis inventory that is still held by the provincial distributor. Newfoundland's figure does not include Cannabis NL's current inventory - only the material they've actually shipped to either consumers or to retail stores.

Accordingly, neither figure is a perfect comparison to Newfoundland's 1,022 kilograms - the real comparable would be somewhere in between Stats Canada's two numbers.

Further, there's the added wrinkle that I don't know if Newfoundland is providing a kilogram of dry cannabis number or a kilogram equivalent of dry cannabis or cannabis oil. I suspect Newfoundland's figure is just dried cannabis without equivalent, but if not, the percentages here would drop only slightly (falling ~5-10%).

Retail Stores Matter

By far the largest takeaway from all of my research on cannabis sales is this: Consumers strongly prefer to purchase cannabis in person.

In Newfoundland, online sales from Cannabis NL make up only ~3% of total sales. This isn't a fault of the website itself - it's an above-average provincial cannabis site, in my view as it offers more flexibility and sorting options and a better interface than, for example, Quebec or Ontario.

Instead, online sales are low in NFLD because consumers have a choice to purchase at retail stores. As of Jan. 30, NFLD lists 25 retail cannabis stores within its borders, primarily on Newfoundland (the island) with two stores in Labrador (the mainland):

Newfoundland has cannabis stores distributed throughout the island and two stores on Labrador as well.

NFLD's cannabis stores are spread around the province, primarily following the Trans Canada Highway on Newfoundland, which is where the province's population is centered. That store count drops to 24 when excluding the Puff Puff Pass Headshop, which has closed due to supply issues.

Newfoundland stores are private. Newfoundland is one of four provinces that only have private stores (along with Alberta, Saskatchewan, and Manitoba). Ontario will up this total to five provinces once Ontario's first private store opens - Canada's largest province has yet to open a single store.

Notably, at least two public companies run multiple stores in Newfoundland:

# of Stores Store Brand Parent Company
10 C-Shop Loblaw
6 Tweed Canopy Growth
9 Miscellaneous (each is different)

Who Wins?

The winners here are very simple: Everyone who sells cannabis in Newfoundland will do better than expected, given the province's small size but oversized portion of national cannabis sales.

Retailers: Retailers will win from these strong sales. For cannabis investors, this primarily means Canopy Growth. Loblaw will also benefit - they own more stores than Canopy Growth - but Loblaw is a large company and ten cannabis stores will not move the needle.

Canopy Growth, meanwhile, has much lower revenue than Loblaw and cannabis sales and sales growth are much more important for Canopy than Loblaw. As I discussed in "Canopy Growth: Welcome To America," Canopy has a long growth ramp in front of it. Given the growth priced into the stock, the market will be eager to see revenue growth - and these results will help Canopy grow its revenue.

Licensed Producers: As with retailers, everyone who sells cannabis in Newfoundland will benefit from Newfoundland's success. Based on cannabis sales in other Atlantic Canada regions, Organigram is likely to get an oversized portion of the proceeds from Newfoundland, but each supplier will benefit. Companies with Newfoundland supply deals include the following:

Licensed Producer Quantity Details
Aphria (APHA) Undisclosed Press release
CannTrust (CNTTF) Undisclosed Press release
Canopy Growth 8,000 kg Press release
Emerald (OTCQX:EMHTF) Undisclosed Press release
Eve & Co. (OTCPK:EEVVF) Undisclosed Press release
Organigram Undisclosed Press release

Source: Author based on company press releases.

Each of these companies may benefit from the success of Newfoundland's successful cannabis launch to varying degrees. I suspect that Canopy Growth - due to owning stores and having a large supply deal - will see an oversized portion of the proceeds. However, given Canopy's large size, other companies may reap greater benefits proportional to their size.

Happy investing!

Disclosure: I am/we are long CGC, TSE:TRST, TSXV:OGI.WT.A. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long Organigram via warrants.