Top Canadian cannabis companies are still struggling, while a US company like Trulieve is realizing profitability and growth, albeit still federally illegal. Lets take a look at the industry from a business perspective. Looking at sales figures it appears that Trulieve a ‘seed to sale’ business is bringing home the bacon, recording over 70 million US in net revenue during the last quarter. Its closest counterpart in Canada appears to be Aurora, not having a large cash injection from outside investment like Canopy, recording just over 85 million CAD including excise taxes.
Aurora was founded back in 2006 according to wikipedia, vs. Trulieve, CEO Kim Rivers said, “When we were getting started back in 2016, Clearwater was our second store.”
Trulieve’s seed to sale business is different from Aurora in that Trulieve grows, produces their products and has retail operations, ‘dispensaries’, and delivery services, to sell the products that they offer. Looking at their website, they offer a vast array of products that are not yet available in Canada. These range from concentrates, vapes, to topical lotion, sunscreen and cream products.
This is an ideal business model, as they have control over the different aspects of their business. They can focus on cost saving measures through the seed to sale process that benefits the consumer. They have a provision for taxes recorded on their financial but other than that it appears the government is letting them run their business, as a business would in other sectors.
Trulieve built a solid profitable base in Florida and is now expanding out to other states, which brings its own challenges with crossing state lines. Also, the federal tax rate is significantly higher for cannabis, not being federally legal at this point and not a lot of incentive for the federal government to make it federally legal. As long as the company is growing and expanding, reinvesting in the enterprise seems like the best play, building out a national company, especially if they can repeat their business model in other states.
Its a completely different situation in Canada, for a company like Aurora, while cannabis has been legalized, the rules and regulations run significantly different, on top of the lack of branding ability. In the US, we are seeing well branded companies like Dixie Brands and Curaleaf that are creating a recognizable label for their retail products.
Prior to legalization, medical marijuana companies could produce product, building a client base and selling to their clients from their own company websites. A new ‘excise’ tax was added to cannabis once legalization occurred, reported by CBC, “But when legalization takes effect in October, users will also have to pay an excise tax of $1 per gram, or 10 per cent of the retail price, whichever is greater.”
Aurora recorded gross revenue of 85 million CAD, with excise taxes of 9.9 million, leaving 75 million and a 43.5% gross profit after cost of sales at 32.7 million. The challenge for Canadian companies looks to be similar, in that provincial governments are setting up their own rules, as US states independently do . Trulieve reported operating expenses at 25%, 18 million, while Aurora reported operating expenses of 131 million against their 75 million revenue.
Aurora is allowed to sell directly to medical consumers through their own website, but they also, have not had the ability to sell many of the products that a company like Trulieve has, with its concentrates, vapes and topicals. Outside of the direct sales to medical consumers, companies like Aurora, have additional challenges with the different regulations imposed by the provincial governments. Trulieve has 40 Florida storefront dispensaries offering delivery, while Ontario has only had 24 retail recreational stores in the province, that were licensed to selected individuals participating in the lottery scheme.
The impact of provincial governments controlling the recreational portion of business has been felt by companies like Hexo, in QC. It has changed the dynamics for companies, being put in a position of only being allowed to wholesale product for recreational. Add the excise tax on to what the licensed producers are selling and it doesn’t leave much room for profit, if any. While government wants to combat black market, they are not leaving companies with a very viable proposition under the current system in some provinces.
For example, if a gram is available on the black market for 5 dollars, if a company wholesales to a government retailer at half price, they are left with $2.50, take out the “excise tax of $1 per gram, or 10 per cent of the retail price, whichever is greater” and what do you have left?… to pay expenses? While Aurora has been building massive facilities to lower costs, without being able to sell directly to consumers, they are at a significant disadvantage compared to Trulieve with their direct sale storefronts and delivery options. Are agriculturally experienced companies like Village Farms and Zenabis even going to be able to deliver grow at a cost that can survive the current recreational climate?
Consumer convenience and availability is a big issue for the Canadian companies, in QC it was reported in October that 20 new stores will be coming in the next six months bringing the total to 43. At the moment that means there is 23 stores to service a population of 8.49 million people. It is even worse in Ontario where the population is 14.57 million people with under 25 retail shops. Trulieve is apparently operating 49 storefronts under their own umbrella as they are expanding out of Florida.
In a situation of only being allowed to wholesale cannabis for recreational in a province like QC, or unless you have been able to acquire a retail license in Ontario, it appears to make it impossible to sustain a viable business that can compete with the black market. Hopefully, with the addition of new products coming to market, potentially higher profit margin products, it will help these Canadian companies with their bottom line.
The other difficulty for cannabis companies in Canada is the ability to sell their products online. The majority of the provinces have adopted a policy of controlling the only legal online source for their province, exclusive of medical, prescription oriented sales. These provinces have made an opportunity for the black market that is crushing the legal industry. Consumers think cannabis is legal, go online to search for something to buy and come across a number of websites that are offering cannabis.
People are none the wiser that they are ordering from an illegal source, unless they have been educated on the fact that they should be buying from the government website, in most provinces. Lets face the fact, if given the choice of ordering from the government, or another modern website, there is a large portion of the population that would choose not to order from the government. On top of that, the pricing discrepancies alone, would send people to another source, as most people price shop online.
Even if they shut down illicit websites, once illicit operators have a client email list, a new site can be popped back up under another domain name almost immediately. A quick email out to their customers and black market business is back on track in no time.
The only financially viable solution to combating the black market appears to be allowing licensed producers sell direct. This seemed like the natural progression, as online systems were in place already for medical cannabis, prior to recreational legalization. It would offset the losses companies are facing trying to deliver a wholesale product that is competitive, with the excise taxes that are in place.
It makes sense that legally regulated and tested products should cost a bit more than illicit products, safety alone makes it worthwhile. Between pesticide issues and unknown substances added to concentrates, as we witnessed with the recent vape deaths and injuries.
For the moment, medical cannabis and global opportunities may be the only solid proposition for turning a profit and paying the bills in Canada. Unless you are able to grow at a fraction of the cost, in wholesaling recreational grow to vendors and the government retail/online venues in the most populated provinces. Until some of the issues are resolved, it seems too early to expect profitability from the Canadian companies.
Once stores are open and products hit the shelves during 2020 and hopefully in time, provincial partners place a bit more trust and faith in cannabis companies to run business like other industries. Allowing them to take on the black market, on a level playing field. Then we could realistically expect to see profits on those bottom lines and a regulated industry flourish!