A new report from the combined forces of Viridian Capital Advisors and EY Cannabis Center of Excellence delivered some hard truths as the cannabis industry continues to mature.
The report noted the positives for the industry, including 24% year-over-year growth in 2022 for Canadian cannabis and 23% for the U.S. markets. But capital raised for the industry fell by 68% in 2022, and M&A activity fell by 73%.
Still, the group said that belt-tightening and consolidation would lead to a healthier industry made stronger in order to face the challenges of federal legalization.
The Positive News
While it may have felt like only doom and gloom in the cannabis industry, there have been some positive points sprinkled in. For example, the report stated that legal U.S. cannabis sales reached $26 billion in 2021, up from $20 billion in 2020.
The report noted that sales were projected to reach $47 billion by 2025, and the industry continues to grow and add more states.
Another nice data point: “Cannabis market growth outperforms adjacent industries – in comparison to other comparable U.S. markets such as alcohol ($74 billion in 2021) and tobacco ($142 billion in 2021), the legal cannabis market is smaller ($26 billion in 2021), but is showing faster growth rates, with a CAGR of 35.4% since 2016, compared to -0.4% for tobacco and -1.7% for alcohol.”
Looking at the statistics for 2022, while investing has fallen, the report found that cultivation and retail segments are still the most desirable areas for investment and lending, resulting in the highest concentration of deals throughout the cannabis value chain.
Also, in 2022 the authors determined that debt financing surpassed equity financing. Plunging stock prices pushed companies to the debt side of the equation. Leading the pack for investment was California followed by up-and-comers like New York, New Jersey, and Missouri.
Even though the report held some glimmers of hope, it didn’t mince words about the continuing state of rebalancing in the industry. The authors said that 2023 would bring a growing number of distressed businesses and assets, with commodification-based wholesale pricing declines continuing.
“Wholesale pricing in California has slightly improved in the past month, but the increase has not been sufficient for cultivators to realize profits. This trend is likely to continue in 2023 as production capacity decreases following consolidations and operators’ sector exits,” the authors said.
“As operators and multistate operators (MSOs) gain more experience in developing capabilities, the period of good pricing seems to be getting shorter in each new market,” they added.
The report doesn’t expect any progress in 2023 with regard to federal legalization. They also aren’t holding out much hope for banking reforms – further stalling enthusiasm among cannabis investors.
Survival of the Fittest
All of these headwinds mean that only the strongest will survive. The report posits that 2023 will see operators leave the industry as they fail or consolidate.
“A great number of both Canadian and U.S. cannabis businesses will no longer be able to rely on initial funding from their investors to sustain operations due to repeated cycles of challenging financial performance,” the report said. “The lack of access to bankruptcy courts in the U.S. will contribute to the difficulties with restructuring distressed businesses.”
Solid MSOs may go bargain-hunting for distressed companies. The authors think it might be easier for larger companies to buy up struggling businesses and brands instead of expanding internally.
In other words, it will be a buyer’s market.