The Canadian cannabis market is outpacing its American counterpart, according to a memo by Pablo Zuanic, founder of Zuanic & Associates.
Through, the overall Canadian cannabis market grew 12% year-over-year, outpacing its American counterpart, which only posted year-over-year gains of 9%. The second quarter, in particular, highlighted a seasonal rebound.
“Second-quarter growth is up 6% quarter-over-quarter, compared to a decrease of 3% in Q1 2023,” Zuanic wrote.
Canada’s statistical agency’s May report revealed a 1.2% month-on-month increase in recreational cannabis sales, totaling $415.6 million.
A key difference between the two countries, according to Zuanic, are the drivers of sales growth. The U.S. growth is largely driven by newly legalized markets, while, Canada’s market base remains unchanged since recreational use was legalized federally in October 2018.
“Canada’s 12% growth is pretty good in that context,” he added.
However, despite the overall growth, the report notes some areas of concern. Zuanic highlighted that per capita consumption in Canada lags behind even less mature U.S. states, with the consumption of recreational cannabis averaging $100 per person, significantly lower than states such as Michigan ($308), Massachusetts ($224), and Arizona ($181).
Second-quarter flower sales, which have traditionally been a key revenue stream, were down 1% year-over-year in Canada, dropping to 39% of total recreational sales from 43% in in the same period last year and 60% in 2020.
In contrast, categories such as pre-rolls and vape saw robust growth at 23% and 18% respectively, with pre-rolls now constituting 30% of Canadian sales compared to 27% a year ago. That diverges significantly with the Californian market, where pre-rolls account for only 17% of sales.
Zuanic noted that other smaller categories experienced mixed trends, with oils down 12% and beverages down 4%.
As for the performance of specific licensed producers, Tilray Brands, including contributions from Hexo, had a 12.1% recreational market share in the second quarter this year, but its total company sales somewhat lagged the overall market growth.
Decibel followed closely, taking second place with a 7.5% market share. The company showed substantial growth, with sales up 19% quarter-on-quarter and an impressive 87% year-on-year increase.
Village Farms International ranked third with a 6.4% share, and Organigram and Auxly took fourth and fifth places with shares of 6.1% and 5.2%, respectively.
Zuanic provided a glimpse into the companies’ cash flow and balance sheet trends, observing that of the 17 Canadian companies reviewed, only three generated positive operating cash flow in 2022. He highlighted the lack of correlation between operating cash flow and adjusted EBITDA. While 12 of the 17 companies reported positive EBITDA in the first quarter of 2023, only seven had positive operating cash flow.
As for balance sheet strength, he noted that several companies showed significant net cash positions at the end of the first quarter in 2023, including Aurora Cannabud ($57 million), Cronos Group ($1.13 billion), Organigram Holdings ($79 million), and Sundial Growers ($252 million).
Companies with high gross cash balances may enjoy strategic flexibility regarding mergers and acquisitions and other initiatives, Zuanic added.
He also acknowledged the recent trend of stock issuance among the companies in the group. He emphasized that while this provides strategic flexibility, long-term dilution could become an issue for some.