As the product destruction from cannabis operators in Canada continues to climb, how should investors perceive the mounting waste?
According to new figures from Health Canada, first reported by MJBizDaily, Canadian cannabis producers destroyed 425 million grams of licensed cannabis last year. On top of that, over 7 million packaged products were destroyed.
The record number of cannabis products destroyed in 2021 was even more than what was sold in the first year of adult-use legalization in Canada, according to the report.
The waste shows another sign of the oversaturation of branded products facing the adult-use Canadian market.
“Since 2018, almost 900 million grams of unpackaged dried cannabis has been destroyed by licensed producers (LPs) because of overproduction and quality issues,” the report indicated.
As brands continue to lag in the customer retention area, should investors begin prioritizing product write-downs when evaluating cannabis picks?
Cannabis waste shouldn’t surprise investors, expert says
According to a financial advisor who closely monitors the cannabis stock market, no one should be surprised at the shocking amount of product lost in Canada.
“I don’t think any investors are looking at this and are dumbfounded,” Nawan Butt, portfolio manager with Purpose Investments, told the Investing News Network (INN).
For the investment expert, this all goes back to the mistakes of the past coming back to haunt the industry.
“It all comes down to these very large LPs that had huge balance sheets available to them, they could just go out there, buy the biggest greenhouses and start churning as much product as they could and then start buying up competitors and warehousing their products as well,” he said.
The excess attached to the heavy prioritization for growth capacity as a way to differentiate from the competition has now led to the serious waste produced in Canada, Butt said.
“It all comes down to just bad planning and exuberance,” the Purpose Investments portfolio manager told INN.
Destruction another sign of struggling industry in Canada
The destruction can be traced back to the oversaturation of cannabis as a result of the serious miscalculation of cannabis companies betting on the interest for bigger production capacities and increased size facilities.
The results are stark to see now, as several Canadian cannabis producers have had to reduce their operations, lay off staff and sell previously touted facility assets.
The problems have only increased for Canadian companies and their public market valuations, from the interest of the market shifting to US operators to limited opportunities when pursuing the US market itself.
“We’re very concerned that ultimately, some of these names can disappear. There might be bankruptcies,” Charles Taerk, president and CEO of Faircourt Asset Management, previously told INN.
Misunderstanding of the cannabis consumer in Canada
Butt told INN cannabis producers didn’t rein in their expectations for the total addressable market in Canada and that’s resulted in the inability to understand who the consumers are, why they consume and how much they will consume.
“It’s bad forecasting,” he said.
The expert said economists have pegged the Canadian cannabis market between C$5 billion and C$8 billion in value.
“These companies thought that they would make a profit by just gaining market share, taking the losses where they could, making sure that their products were everywhere… But what they failed to do was, again, identify who the consumer is,” he said.
From the launch of adult-use legalization in 2018, Butt said, Canadian LPs were gunning for the high end in terms of production expectations.
“We see non forecasting in a lot of small industries where there isn’t a lot of research around the consumer and what the terminal capacity of the consumer is,” he said. “That’s what this industry has fallen prey to.”
Clean-up act to follow?
When asked if he foresees any cannabis company taking advantage of these product losses numbers to prioritize it as part of a turnaround strategy for investors, Butt said that is already the strategy for Canadian operators, in a way.
“(Canadian LPs are) talking about lowering their losses, they’re talking about how to improve metrics, how to improve wastage and really how to get to profitability,” Butt said.
In terms of priorities for Canadian cannabis producers, the financial advisor told INN he sees them chasing after market share.
“I think a lot of these companies are now at the brink of failure and what they need to prove to their investors is if they can gain or keep market share,” he said.
The Canadian cannabis industry has made clear mistakes that are rearing their head and making life increasingly more difficult for the market as a whole.
These damning figures from Health Canada show the amount of waste the industry has produced.
“This industry is still a long way from equilibrium and we’re going to see more downside in this industry before we see upside,” Butt said.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Image and article originally from investingnews.com. Read the original article here.