Brutal Week for Weed Casts Chill Over Prospects for Cannabis 2.0

Article by Vanmala Subramaniam, Financial Post

Brutal week for weed casts chill over prospects for Cannabis 2.0 Companies already have a mountain of unsold product, what happens when drinks and edibles hit the shelves? Vanmala Subramaniam

If there’s a lesson that Canada’s pot industry can take from a devastating week that saw the country’s largest producers post massive losses amid waves of product returns and piles of excess inventory, it might be this: understand your market first, sell your product later.

And with cannabis 2.0 looming, there isn’t much time to learn it.

“Any company that’s looking to make a product for cannabis 2.0 should wait six months to see what comes out in the market,” said Narbe Alexandrian, president and CEO of Canopy Rivers, the venture capital arm of Canopy Growth Corp.

Canopy Growth suffered a massive revenue miss in its latest quarter largely due to certain products — oils and soft-gel capsules — that simply weren’t selling well on the recreational market. The result of that miscalculation in demand cost the company approximately $30 million in product returns. They weren’t the only ones. New Brunswick licensed producer Organigram Holdings Inc. too had to write down $3.7 million due to product returns.

That problem could be magnified when a host of new product categories hit shelves in the coming months as part of the legalization of drinks and edibles.

“I feel that right now a lot of companies are going out and blindly assuming what customers like based off a few surveys,” Alexandrian noted.

Consumer preferences for different kinds of cannabis products only started to become evident about six months into legalization, as private retailers and provincial stores accumulated enough data on what products were selling well, and what products weren’t.

One of the main takeaways, according to Alexandrian, has seemed to be that good looking, premium dried bud with a high THC content sells well. Soft-gel capsules and oils do well among medical patients to some extent, but not so much in the recreational space.

“We didn’t oversupply soft-gels and oils in the consumer market, but we are seeing strong demand for those products in the medical market,” said Cam Battley, chief corporate officer of Aurora Cannabis Inc., which saw its revenue decline 25 per cent for the period ending Sept. 30 due to weak recreational sales.

Battley says that Aurora has been gathering market data from the U.S. and carefully tracking consumer preferences in states where recreational pot is legal in order to accurately gauge what kinds of products to introduce to the market next year.

“The leading segments are still dried flower, then vape pens, edibles, concentrates. I don’t want to be critical of companies that are prioritizing beverages, but based on the U.S. experience it might take a bit more time for that segment to become attractive.”

Battley says that Aurora will be adopting somewhat of a wait-and-see approach to cannabis 2.0 in order to better assess what products to fill the market with.

“We actually have already been doing that. I think we have done a pretty good job of knowing our consumers — better than most of our peers — in that we have not thus far, suffered the same challenges with respect to significant returns,” he told the Financial Post.

In the brief few months following legalization when the Canadian market experienced a severe cannabis shortage, some licensed producers adopted a strategy of “channel stuffing,” or shipping any finished product they had on hand to wholesalers, in the hope that they would accumulate market share. That strategy, to some extent, backfired, as an increased variety of products came to market and consumer preferences became more evident.

Read the full article here.

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