For all the hype that’s been surrounding legalization in Canada, we’ve seen sales come to a bit of a halt early on. Dried cannabis sales of 6,416 kg in October were impressive for a two-week period but that pace hasn’t kept up. Sales in November increased at a much more reduced rate, to 7,360 kg for the whole month and rose a little more in December up to 7,385 kg. However, in January, Health Canada released its latest sales numbers and we’re already starting to see a decline. For the first month of the year, just 7,115 kg were sold, for a decline of over 3% from the previous month.
Are sales moving to the black market?
In Q4, Statistics Canada still saw annualized sales for cannabis largely coming from the black market. Of its estimate of $5.9 billion, it estimated that the legal market made up just $1.2 billion of that amount, with the rest coming from the black market. With significant supply issues plaguing the legal cannabis market and options still being very limited for consumers, it wouldn’t be a big surprise to learn that the industry continues to be dominated by the illicit market.
Although these are still early figures, they suggest that the legal market may not be growing as expected. And that could be a problem for the industry as consumers have likely grown frustrated with not only the lack of availability but also the higher prices that come with excise and sales taxes. The black market can offer cheaper prices and less hassle for users that may not feel the need to purchase from a licensed dealer.
However, it’s still early on and we’ll likely see sales rise again once we see Ontario permit pot shops in the province. But with only 25 licenses approved initially, it may not be enough to generate much growth overall. Until the retail market is fully developed we’re likely going to continue to see this trend continue for the foreseeable future. The sad reality is that for that to happen it might take years, at least until supply issues are sorted out.
What does this mean for investors?
For investors, it’s a reminder that growth prospects might be limited in the near term, especially for companies operating primarily out of Canada. That’s why we’ve seen Aphria Inc (TSX:APHA)(NYSE:APHA) and other cannabis companies look to expand to other parts of the world in the hopes of being able to diversify their sales and not be overly dependent on the Canadian market. With many international markets legalizing cannabis, the global market continues to grow in size, and companies like Aphria will stand to benefit. Gaining these first-mover advantages could pay off in the long term and could prove to be very valuable in obtaining a leadership position in key markets.
The downside, however, is that costs will continue to rise as increased overhead will add more expenses and weigh down a company’s financials. Ultimately, it’s a balancing act that investors will have to be patient with as it may take some time before for expenses start to settle down for Aphria and others pursuing global dominance.
