State of a Fragmented Market

Written By Canadian Cannabis Exchange

October 11, 2023

Over 2023 M&A activity has plummeted in the Canadian cannabis industry. According to Viridian Capital there were around $9 billion in Canadian cannabis M&A transactions in 2021, just under $2 billion in 2022 and less than $500 million in 2023 YTD. There are several factors that have affected this. In 2021 the market was still surging from recent recreational legalization and retail growth was growing at an annual pace of 47% per year, boosted by the COVID pandemic, which caused a surge in cannabis sales.

Since then, market growth has slowed, competition has continually increased, the market has become oversupplied, interest rates have risen, and capital has dried up. Large public companies have also continued to miss revenue growth and profitability targets, causing an overall wariness by investors.

Source: Viridian Capital Advisors

Lack of significant M&A has led to a continually fragmented market. According to BCMI Research on publicly traded Canadian cannabis companies, the top four companies in Q1 2023 only held 34.2% market share. Without meaningful M&A activity in Canada the market will remain highly fragmented.

A fragmented market creates several opportunities but also challenges for companies:

Intense Competition: In a non-consolidated market, there are often many competitors offering similar products or services. This intense competition can lead to pricing pressures, reduced profit margins, and the need for companies to continuously innovate and differentiate themselves to gain a competitive edge. Some companies may intentionally operate unprofitably for fear of ceding market share to competitors.

Market Entry and Market Share Changes: There continues to be a threat of new entrants to the market. This risk is exasperated by the lack of brand recognition and loyalty in the market. Start-up companies may find it easier to carve out a niche or enter the market with innovative solutions and new branding.

For small to mid-size players it is easier to take advantage of the gaps and gain market share. However, market share is unstable and companies that gain market share one year can quickly lose it in the next.

Reduced Pricing Power: Companies in non-consolidated markets often have less pricing power. This phenomenon has been seen across Canada as many companies have been competing based on price while they have been able to access cheap bulk wholesale flower in an oversupplied market.

As bulk wholesale supply tightens, companies may struggle to keep products at the low prices they offered customers in 2022 and 2023. As input costs continue to rise and provincial bodies want to keep pricing low, LPs’ margins will be squeezed significantly.

Barriers to Scaling: While entering non-consolidated markets can be easier, scaling up can be challenging. Cannabis companies continue to face difficulties in expanding their operations, distribution networks, and market reach due to the lack of established consolidation-driven synergies.

Overall a highly fragmented market is highly susceptible to fluctuations in supply and demand, and in turn, price volatility. We have seen that within bulk wholesale pricing, which fell by 42% from 2021 to 2022. Companies need to be agile and responsive to market changes to avoid overproduction or underproduction. Many CCX clients utilize our integrated platform and brokering services to remain agile and respond faster to changing market demands.

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