Making macro profit in the micro world
December 6, 2021 By David Brown
As the Canadian cannabis market grows and matures, the need to become more competitive is increasing. Wholesale prices on cannabis are moving towards commodity-level models and many growers are trying to determine how to keep the lights on while looking at per gram prices of a few dollars.
With nearly 800 federal licence holders as of the end of October, the cannabis market is becoming increasingly saturated with cannabis products, especially dried flower, which is having a ripple effect on the market.
A higher volume of dried flower-seeking processors drives the price down and gives leverage to processors. The sheer volume of product is forcing provincial distributors and retailers of all kinds to select from only a small portion of available products. Some provinces continue to implement limits on how many new producers they will even entertain product offerings from, giving even more leverage to those processors with an established foothold in the market.
On top of that, additional bottlenecks exist at the provincial level, focusing on high THC strains and away from outdoor cannabis. This can make it difficult for outdoor growers or small batch indoor growers with more unique, exotic cultivators that happen to be under the current 20 per cent THC threshold, to find a buyer.
The market for micros is building out extensively, as well. As of the end of October, there were nearly 260 micro licence holders in Canada. There are 188 stand-alone micro cultivation licences, 35 stand-alone micro-processors, and 39 micro cultivation and micro processing licence holders.
This increase in producers and supply means a significant downward trend on prices for growers. Those just entering or looking to enter the market need to be aware that this landscape may only continue to saturate. Wholesale prices on even high-quality outdoor cannabis can be around—or even under—$1 per gram for some, and even for indoor prices can hover around $2 on average. While these numbers can be higher for an exceptionally high-quality crop, these are increasingly becoming the ‘unicorns’ of the market.
Having realistic expectations for these kinds of prices can help inform long term business planning. How much is it worth to build a new facility or secure a plot of land to grow outdoors, if your revenue stream is $1 to $2 per gram? How can you keep your operating costs as low as possible to ensure your business can survive?
Control the supply chain
One approach some licence holders take to realize more profit on their product, is controlling more of the supply chain by acquiring a processing and sales licence for their product. This can mean more upfront costs in terms of licensing fees, infrastructure and operating costs, and more logistical issues such as paying the federal excise tax and provincial recall insurance. But it can also potentially mean another $1 or $2 per gram in profits after these factors are accounted for.
But as more provinces start limiting the amount of product they order and the number of producers they approve of doing business with, even these licences are not necessarily a guarantee to a direct entry point to these retail markets. Ensuring you understand the realities of the provincial landscapes you want to sell in beforehand, and the realities of processing, can help guide these decisions.
A medical sales licence can also provide the ability to enter another consumer market other than through provinces. With the appropriate federal licences in place such as processing, there can be more control over the supply chain.
While the non-medical distribution system is provincially managed, the medical system is regulated at the federal level and allows for online and mail order sales across the country.
Managing a medical sales platform can mean more revenue but it can also mean more upfront costs and ongoing operational expenses—like the processing sales licences on the recreational side—you’ll be paying for the excise stamps and recall insurance, as well as having to manage sales, customer service, and shipments yourself.
Farmgate and direct sales
Farmgate sales licences that allow producers to operate an on-site retail store is another option some provinces are slowly allowing. Ontario began issuing these types of licences earlier this year, and New Brunswick has just begun its process. British Columbia has said it plans to begin such a program sometime in 2022.
Farmgate sales can be seen as an opportunity for micro licence holders to control more of the supply chain. However, it also means the additional costs of building and operating a retail store. Developing a plan for on-site retail could be built around more long-term special event planning than daily sales, especially for more remote, rural locations.
Direct sales are also being discussed in more provinces allowing for producers, micro or otherwise, to sell more directly onto provincial retail systems. Options may include bypassing the provincial distribution system, as B.C. has said it is looking at in 2022, or giving retailers a wider array of choices to purchase, than those currently stocked in provincial warehouses, as Ontario is currently developing.
Such direct sales models can also offer opportunities for micros to find a pathway into an otherwise crowded market, potentially getting around barriers from some provincial buyers. This can allow micros to build relationships with retailers who, because of micros’ often more limited supply, could end up bringing a unique product offering for a small group of retailers. Giving retailers something to differentiate themselves from their competitors can be a mutually beneficial arrangement. But provincial markups, even on these kinds of sales, will likely continue. Such direct delivery programs could end up placing more logistical responsibilities on micros and their partners to get product into the hands of retailers.
For all of these potential solutions, there are pros and cons. Additional expenses in infrastructure, paperwork and operating costs are balanced against slightly higher profit margins. Micros should carefully weigh those options with what it takes to simply run a small, streamlined cultivation licence that can outsource these costs to others, while still operating at a profitable level.
David Brown is the founder of StratCann, a cannabis industry publication with a special focus on micros and nurseries. Prior to StratCann, David was a senior policy advisor to Health Canada’s cannabis branch from 2018 to 2020.
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