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In the unfolding narrative of Canada’s cannabis industry, a conspicuous trend has emerged: numerous large-scale cannabis greenhouses and indoor grow operations, among the largest in the nation, have either been divested or rendered inactive. This development is a direct consequence of the industry’s ongoing endeavors to strike a balance between supply and demand, following a protracted period characterized by excessive production.
The scale and economic impact of these closures are substantial. The facilities in question, each representing a significant investment, have involved financial commitments ranging from 100 million Canadian dollars (equivalent to approximately USD 73 million) to more than CA$500 million. The reasons behind the closure of these expansive and costly operations are manifold and complex.
Several factors contribute to this trend. One prominent reason is the initial overestimation of market demand, leading to an oversupply of cannabis products. This miscalculation has resulted in a glut of products in the market, exerting downward pressure on prices and reducing the profitability of these large-scale operations.
Another contributing factor is the evolving regulatory landscape, which has posed challenges for these operations in terms of compliance and adaptability. The stringent regulatory requirements have added to the operational costs, further impacting the financial viability of these facilities.
Market dynamics have also played a role. The increasing competition from smaller, more agile producers, who are often able to adapt more quickly to market changes and consumer preferences, has made it challenging for these larger operations to maintain their market share.
Additionally, shifts in consumer preferences towards more specialized and premium products have made it difficult for large-scale, mass-production facilities to cater to these evolving tastes. The market is seeing a growing demand for craft cannabis products, which are typically produced by smaller-scale operations that focus on quality and unique strains.
The closure of these large facilities is a reflection of the industry’s ongoing adjustment to these realities. It represents a significant recalibration of the business strategies and operational models within the cannabis sector in Canada. As the industry continues to mature and evolve, these changes are indicative of a broader transformation, signaling a move towards more sustainable and market-responsive production methods.
Navigating the Aftermath of Overproduction, Market Shifts, and Greenhouse Innovation
The landscape of the cannabis industry in Canada has been significantly reshaped by a series of harsh macroeconomic realities, particularly in the aftermath of the legalization of adult-use cannabis in 2018. Canadian cultivators, buoyed by optimistic projections and the initial excitement surrounding legalization, invested heavily in expanding cultivation capacity. This expansion, both before and after legalization, led to a situation of large-scale overproduction. The resultant glut in supply precipitated a notable decline in prices, especially for products that were of low to mid-quality, thus adversely affecting the profitability of numerous operations within the industry.
Compounding this issue was the realization that many of the greenhouses, initially deemed as cornerstones of a booming industry, failed to deliver on the cost-effectiveness that was anticipated by executives and investors alike. These facilities, once symbols of ambitious growth, became liabilities as their operational costs did not align with the declining revenues. The disconnect between the expected and actual performance of these greenhouses led to a strategic reevaluation, resulting in the closure of several such facilities.
The financial burdens borne by these companies also played a critical role in these closures. Many companies found themselves saddled with significant levels of debt, a portion of which was often owed to the Canadian government. The inability to service these debts or generate sufficient revenue led some companies into insolvency. A case in point is the Phoena Group, formerly known as CannTrust. When this entity was granted creditor protection and consequently shuttered its facility in Niagara, Ontario, it resulted in the removal of approximately 450,000 square feet of cultivation space from the industry.
The cumulative impact of these developments is starkly evident in the overall reduction of Canada’s licensed indoor and greenhouse marijuana cultivation areas. Recent years have seen approximately one-third of the licensed cultivation space being taken offline. Health Canada data as of March 2023 indicated that there were 16.3 million square feet of licensed cultivation area for greenhouse and indoor facilities, a significant decrease from the peak of 23.9 million square feet observed in mid-2020. This peak coincided with the tail end of a cannabis stock craze, during which Canadian investors heavily financed indoor and greenhouse capacities far exceeding the actual market demand.
In contrast, the contraction in outdoor production has been less pronounced. As per the latest regulatory data, there remain about 63.2 million square feet of outdoor area licensed for cannabis production. This figure represents a decrease of approximately 18% from the late 2021 peak of 76.7 million square feet. The slower rate of reduction in outdoor cultivation space as compared to indoor and greenhouse spaces reflects a different set of dynamics and perhaps a more sustainable approach in the segment of outdoor cannabis production.
How much more time?
Industry experts have posited that the current trend of reducing cultivation spaces, particularly in the indoor and greenhouse sectors, is likely to persist until market prices stabilize. This ongoing process of contraction and consolidation within the cannabis industry is seen as a necessary adjustment to the existing supply-demand dynamics, which have been skewed by the initial overestimation of market demand and subsequent overproduction.
A recent and illustrative example of this trend is the decision by SNDL, an Alberta-based licensed producer, to close its CA$100 million indoor facility located in Olds. Announced in October, this strategic move was described by the company as an effort to “enhance competitiveness.” This decision underscores the challenges faced by large-scale producers in maintaining profitability in an increasingly competitive and saturated market. The closure of such a significant facility reflects the broader industry shift towards more sustainable operational scales and the pursuit of cost efficiencies.
The closure of SNDL’s facility is indicative of a broader recalibration within the industry, where producers are reevaluating their business models and operational strategies. This involves a critical examination of the scalability, cost structures, and market alignment of their cultivation facilities. Companies are increasingly focusing on optimizing their operations to better align with the current market realities, which include a more discerning consumer base, fluctuating prices, and intense competition.
The decision to close large-scale facilities like SNDL’s is often a multifaceted one, influenced by factors such as the cost of production, the ability to adapt to market trends, and the need to manage financial liabilities more effectively. In many cases, these closures are part of a broader strategy aimed at streamlining operations, focusing on more profitable segments, and enhancing overall competitiveness in a rapidly evolving market.
As the cannabis industry in Canada continues to mature, such strategic reconfigurations are likely to become more common. The focus is increasingly shifting towards creating a market that is not only sustainable in terms of production and supply but also responsive to the evolving preferences and demands of consumers. This ongoing adjustment phase, marked by facility closures and strategic pivots, is a critical step in the industry’s journey toward establishing a stable and well-balanced market ecosystem.
Canada’s approved Cannabis growing area
The licensed cultivation of cannabis in Canada has experienced a steady decline since the year 2021, signaling a progression toward a state of equilibrium within the industry.
The decision to close SNDL’s indoor facility led to the withdrawal of a substantial 448,000 square feet of licensed cultivation area from the Canadian cannabis market. To put this into perspective, this area is equivalent to nearly eight standard football fields, highlighting the significant scale of the operation that was discontinued. This move by SNDL is reflective of a broader trend among large cannabis producers in Canada, who are reevaluating their operational footprints in response to market dynamics and financial pressures.
This trend was further exemplified earlier this year by Canopy Growth Corp., headquartered in Smiths Falls, Ontario. In a significant development, Canopy Growth Corp. decided to close and subsequently sell its flagship cultivation facility. The transaction, valued at CA$53 million, was notable not just for its scale but also for the facility’s return to its original owner, the renowned chocolate manufacturer Hershey Canada. This move by Canopy Growth Corp. represents another step in the industry’s ongoing process of consolidation and realignment.
Other prominent licensed producers have also taken similar actions. For instance, Tilray Brands, in 2021, announced the closure of a “flagship” facility located in Nanaimo, British Columbia. This announcement came shortly after the company acquired the facility, indicating a rapid strategic shift in response to evolving market conditions.
Additionally, Cronos Group, another key player in the industry, made headlines in 2022 with its announcement of a planned exit from its production facility in Stayner, Ontario. However, this plan was subsequently revised. Instead of a complete shutdown, Cronos Group opted to maintain certain critical components of its operations at the Stayner facility. These retained operations included distribution warehousing, specific research and development activities, and the manufacturing of a portion of the company’s product lines. This strategic adjustment by Cronos Group highlights the nuanced approaches being adopted by producers as they navigate the complex landscape of the cannabis industry.
The closure and downsizing of these large facilities signify a notable shift in the industry’s approach to cultivation and production. While initially, the focus was on rapid expansion and large-scale production, the current trend leans towards more measured, sustainable, and financially prudent operations. This shift is indicative of the industry’s adaptation to the realities of supply and demand, the need for financial stability, and the importance of aligning production capacities with actual market needs. As the industry continues to evolve, these strategic decisions are shaping a new phase in the Canadian cannabis market, marked by greater operational efficiency and market responsiveness.
Big old facilities not succeeding
The closure of the largest cannabis facilities in Canada can be largely attributed to their establishment during the initial boom-and-bust cycle of the cannabis industry. This period, spanning from 2017 to 2020, saw significant investment and construction of these large-scale operations. These facilities, conceived and developed in the early exuberance of the cannabis market, faced challenges as the industry matured and market dynamics evolved.
Chris Damas, an experienced cannabis industry analyst based in Ontario, has provided insightful commentary on this phenomenon. According to Damas, new entrants in the cannabis market, arriving with what he describes as a ‘second-mover advantage’ and a lower cost base, were able to compete more effectively. This allowed these new players to aggressively capture market share from the larger, established facilities that were the hallmarks of the initial boom period.
A telling example cited by Damas is the case of Cannara Biotech in Quebec. This company played a significant role in the decline of Hexo Corp.’s largest cannabis facility, which, in a turn of events emblematic of the industry’s shifting landscape, is now set to be repurposed for cucumber cultivation.
Damas points to several other factors contributing to this trend, including:
- Price compression across most flower categories placed downward pressure on the revenues of these large facilities.
- A distinct lack of demand for flower products with a THC content of less than 25%, contributed to the decline in profitability for products typically produced by these facilities.
- Consequently, the market for what Damas terms ‘factory weed,’ characterized by large volume but lower quality, experienced a significant downturn.
Moreover, Damas notes that some of the most substantial costs associated with operating these facilities, such as energy and labor, have escalated since their inception. This increase in operating costs further eroded the economic viability of these large-scale grows.
In British Columbia, as per Damas’ analysis, Pure Sunfarms played a role in hastening the decline of some value flower sellers, while in New Brunswick, Organigram Holdings leveraged its robust cash position and partnership with British American Tobacco to gain a competitive edge.
Damas concludes that these various competitors, with their different strategies and advantages, collectively contributed to pushing the larger, legacy greenhouses into positions of chronic negative operating cash flow. This financial strain, coupled with the evolving market dynamics, necessitated the closure or repurposing of these once-prominent facilities, marking a significant shift in the Canadian cannabis industry’s landscape.
Moving to smaller-scale production
The dynamic shift in the Canadian cannabis industry from large-scale “factory-style” cultivation operations to smaller, more specialized micro-cultivation facilities represents a significant trend in response to changing market conditions and consumer preferences. These micro-cultivation facilities are characterized by their relatively lower startup costs and their ability to produce cannabis of a higher quality compared to their larger counterparts.
In recent times, the allocation of cultivation licenses by Canada’s federal government has underscored this trend. Last year, the government issued only 58 standard cultivation licenses, which are notable for having no restrictions on square footage, thus allowing for larger-scale operations. In stark contrast, during the same period, the government awarded 130 new micro-class licenses. These licenses are distinct in their stipulation of a cultivation limit, confining operations to a surface area of up to 200 square meters (approximately 2,150 square feet).
This shift towards micro-cultivation is not merely a matter of scale but also product quality. One of the key advantages for companies operating under micro-class licenses is the generally higher quality of their cannabis products. This is a significant factor, as there appears to be an increasing consumer inclination towards premium, artisanal cannabis products. Unlike mass-produced varieties, micro-cultivated cannabis often benefits from more attentive, artisanal growing practices, which can lead to a superior product in terms of flavor, aroma, and potency.
The rising popularity of micro-cultivation is also reflective of a broader consumer trend favoring quality and uniqueness over quantity and uniformity. This trend is evident in various sectors and is now increasingly prominent in the cannabis industry. Consumers are showing a growing appreciation for products that offer a distinctive experience, often associated with smaller-scale, carefully crafted goods.
Furthermore, the move towards micro-cultivation is also a response to the economic realities of the cannabis industry. The lower startup and operational costs of micro-cultivation facilities make them more financially viable, especially in a market that has experienced price compression and heightened competition. This economic factor, combined with the consumer demand for high-quality cannabis, makes micro-cultivation an increasingly attractive model for entrepreneurs and investors in the cannabis sector.
In summary, the shift towards micro-cultivation in the Canadian cannabis industry reflects a strategic adaptation to market demands, consumer preferences, and financial considerations. This trend is likely to continue shaping the industry, as producers seek to align with the evolving landscape and meet the sophisticated demands of the modern cannabis consumer.
