Canadian Cannabis Sales Finally Perk Up

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Includes: ACB, CGC, HMLSF
by: Jonathan Cooper
Summary

Canadian cannabis sales rose 23% in April 2019.

Results to-date have been disappointing, well below analyst expectations from pre-legalization.

The April sales gain was due to Ontario's addition of under two dozen retail stores.

There's more work to be done. On a per capita basis, Ontario has fewer than one-sixtieth as many stores as Colorado.

All dollar figures are in Canadian dollars unless otherwise noted.

Disappointing Sales

Thus far, the Canadian cannabis market has been disappointing.

The total cannabis market in Canada, including medical and illegal as well as legal recreational products, is expected to generate up to $7.17 billion in total sales in 2019. Legal sales are expected to contribute more than half of this total-up to $4.34 billion-in the first year."

Deloitte: 2018 cannabis report

Prior to Canada legalizing recreational cannabis, industry analysts were expecting sales to be much higher than they have been to-date. A report from Deloitte suggested that Canada's legal cannabis market could generate $1.8 billion to $4.3 billion in its first year.

Through 6.5 months, the market is on pace for much less than that:

Deloitte Estimates

Sales-to-date

Est. first-year sales

Canada

$1.81-4.34 billion

$0.39 billion $0.74 billion
West

$0.57-1.37 billion

$0.15 billion $0.29 billion
Ontario

$0.70-1.68 billion

$0.07 billion $0.16 billion
Quebec

$0.42-1.00 billion

$0.08 billion $0.15 billion
Atlantic

$0.12-0.29 billion

$0.08 billion $0.13 billion

Source: Deloitte estimates; Stats Canada data; estimate by author.

Through six-and-a-half months, Canada has sold $395 million of cannabis at retail and is on pace to sell approximately $740 million of cannabis in the first year (this estimate assumes sales until October 17, 2019, are flat from April sales).

Deloitte split Canada into four regions. Of those regions, only the Atlantic region has a chance of hitting the low-end of Deloitte's guidance range, with estimated sales of $130 million compared to a range of $120 million to $290 million.

Chart Data by YCharts

Partly because of these disappointing sales, although also due to a large market run-up to legalization, Canadian cannabis stocks are down significantly since legalization, with the Horizons index (OTC:HMLSF) down 24% since October 2018.

April Brings Good News

However, April results are significantly improved from prior months. Stats Canada released April sales figures on June 21st, showing that Canada has its strongest month of cannabis sales since legalization.

In April 2019, Canadians purchased $74.7 million of recreational cannabis at retail, up 23% from sales in March. On an annualized basis, sales rose to $908 million, up from $718 million, up 27% due to April's 30-day length.

This is the most significant uptick in Canadian sales since legalization, with retail sales clustered in a tight range prior to this month.

This uptick was widely expected and very predictable for those who have been following the market closely.

Ontario Opens Stores

The reason for this uptick is quite simple: Ontario finally opened its first retail stores on April 1st. In its initial wave of retail stores, Canada's largest province allowed 25 retail stores through a heavily-criticized lottery system, although one winner was later disqualified. More than half of those stores opened in April, with CBC reporting that 13 stores were open as of April 25th.

As Ontario opened its first stores, sales in the province skyrocketed 156% from $7.7 million to $19.7 million. Outside of Ontario, Canadian cannabis sales grew at a more modest 3% month-over-month (or about 47% CAGR).

Even after sales increased 156% in a month, Ontario is still second-last among Canadian provinces in per capita sales. Only British Columbia, my home province, has lower per capita sales with residents of BC purchasing only $6/year of legal, recreational cannabis.

As with Ontario, British Columbia has few retail stores and the private retail stores that are open tend to have high prices and heavy restrictions on advertising. For example, their websites are not allowed to list a menu or prices and must have tinted glass windows. Notably, liquor stores in British Columbia do not face any of these restrictions.

More Stores Needed

Source: Alcohol and Gaming Commission of Ontario.

Ontario, and most Canadian provinces, still needs more stores. According to the Alcohol and Gaming Commission of Ontario, Ontario has 21 cannabis stores approved to open and operate with 3 applications still pending.

Ontario covers over 1 million square kilometers (416,000 square miles) and has approximately 14.5 million residents. Despite that size and population, the province still, as of June 24th, has only 21 retail cannabis stores.

Population Cannabis Stores

Population per store

Ontario 14.5 million 21 690,000
Colorado 5.7 million 565 10,000

Source: Government data and other sources.

For comparison, Colorado has 565 licensed retail marijuana stores as of June 3rd for a population of 5.7 million. On a per capita basis, Colorado has nearly 70 times more cannabis stores than Ontario.

It should, therefore, come as a little surprise that Coloradans purchase a lot more legal cannabis that Ontarians:

(Based on trailing-year sales in Colorado, excluding medical cannabis, converted to Canadian dollars and based on April 2019 sales in Ontario.)

Coloradans purchased U$276 of cannabis per capita in the trailing year ended April 2019, including U$219 of recreational cannabis. This is 17 times higher than Ontario's per capita sales.

It is probable that there are cultural differences between Ontario and that long-term sales figures between the two districts will vary; however, it is unlikely that long-term demand will be 17 times higher in Colorado. This sales disparity is likely to be caused by three factors:

  1. Ontario has few stores.
  2. Canada has a limited range of legalized cannabis products. Canada will legalize vapes, edibles, and beverages in December 2019. All are already legal in Colorado.
  3. Colorado's legal market is much more mature, and legal stores have pushed out the illegal cannabis market to a much higher extent.

Each of these three factors is likely to be short term in nature. Colorado opened its first recreational cannabis stores in January 2014. That month, Colorado's cannabis sales were only U$32/capita on an annualized basis. Their sales were about 7x higher (per capita) in April 2019, more than five years later.

It will take Ontario's market years to reach its mature size as the province allows more stores, expands the range of legal products, and the legal cannabis market marginalizes the illegal market both through competition and through enforcement of laws.

Over the long term, analysts still expect the Canadian market to be enormous. In BDS Analytics' June 20th report on The State of Legal Cannabis Markets, the company suggested the Canadian recreational cannabis market could generate $6.2 billion (U$4.8 billion) in sales per year.

April's strong sales results are another step towards realizing the potential of the Canadian recreational cannabis market.

Happy investing!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.