COVID Pandemic Accelerates Recreational Cannabis Industry

By Pedro Palandrani, Research Analyst Global X.

With nationwide legalized recreational cannabis, Canada is at the epicenter of the emerging legal cannabis industry. As a partial result of the COVID-19 pandemic and resulting stay-at-home orders, cannabis supply companies have had to meet a rapid surge in consumer demand. New store openings and the sale of edibles are helping to fuel greater legal consumption.

When stay-at-home advisories took effect in Canada, online cannabis orders surged from 5,000 in mid-March to 9,000 by mid-April, according to estimates from Cannabis Benchmarks. Sales reached C$216 million for March, more than triple the monthly total in 2019. This spending may be explained by the emerging trend of the cannabis industry’s apparent similarities to the alcohol and tobacco industries. Like consumer staples, both products historically have strong sales in times of economic weakness. For instance, alcohol consumption increased 7.2% in 2008-2009 even as consumer discretionary spending fell 9.35% over the same time frame.
See also: COVID And Marijuana Legalization: Lessons Of History

Another contributing factor is the new range of products that suppliers can sell thanks to the implementation of Rec 2.0. Before January 2020, only dried flowers and oil were permitted for legal cannabis sales. Retailers are now permitted to sell more palatable options like beverages, edibles, and vapes, which may appeal to a wider base of consumers. In comparable mature markets, such as Colorado, these derivative products account for more than half of all legal sales.

Despite surging demand, significant challenges remain. It is difficult for cannabis growers to adjust to shifting market dynamics given that plants need to grow 4 months on average before harvesting. Another problem is the dearth of retail stores in key provinces in Canada. Regulations limiting the number of retail stores that open each quarter have been a primary cause for many companies falling short of early sales expectations. On a recent earnings call, Organigram CEO Greg Engel pointed out that recreational cannabis sales per capita are highly correlated to the number of stores available to serve a population base and the proximity of stores to customers.

At the end of Q1 2020, Canada’s most populous province, Ontario, had only 52 cannabis dispensaries. That’s only 4 dispensaries per million people in the region, compared to about 180 stores per million in Colorado. Based on population levels, consumption estimates, and extrapolation of dispensaries density, Ontario could support over 1,000 stores, about 20 times the current amount. A lack of stores supports continued black-market sales, which by some estimates represent about 80% of cannabis sales in Canada.

Fortunately, Canadian authorities have recognized this dynamic and are moving to open more legal dispensaries. In Q1 2020, even amidst the COVID-19 crisis, 191 new dispensaries opened in Canada. In combination, these factors indicate that Canadian Licensed Producers (LPs) will see greater demand as consumers move from illicit markets to legal markets. Despite struggling due to the current crisis, cannabis suppliers in Canada have a silver lining in strong tailwinds for the industry and the ability to capitalize on surging demand. Recognizing the robust demand for cannabis, both Canada and various US states declared dispensaries to be essential services, allowing sales to continue through the COVID-19 crisis.

See also: COVID-19's Impact On The Cannabis Industry Proves That National Legalization Is Near

In the U.S., economic downturns can accelerate efforts to find new sources of economic stimulus and tax revenue. Legalizing (and taxing) recreational cannabis is one such avenue states could pursue given its track record of generating economic growth and taxes. Estimates hold that nationwide legalization in the U.S. could generate $132 billion in aggregate tax revenue and more than a million new jobs across the country by 2025. Such growth comes not from an unproven, speculative market, but from the conversion of a largely illicit market to a legal, regulated one. Such taxes and economic growth could be particularly welcome given stalling economic growth and swelling debt caused by COVID-19.

Image by Javier Hasse.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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