TLDR: Canada’s retail roll-out has been crap and is constraining sales. Online sales are terrible. But, the data for actual retail sales is quite compelling, and could indicate the market is even bigger than some initially thought.
This is the first in a series of ‘In Data We Trust’ pieces, where we take real data and add a layer of analysis to further our understanding of the cannabis industry. If you like these types of articles or have ideas for others, let us know.
Slow Retail Roll-out
We all know the retail roll-out in Canada has been slow. In fact, it appears to be the primary cause for what can only be called tepid Canadian cannabis sales data as demand has been constrained by limited points of access. From what we are hearing/seeing very few people actually want to purchase online. Perhaps this is because cannabis is a tactile product, perhaps the information provided by budtenders is valuable enough to show up in person, or perhaps buyers are concerned about data privacy (not surprisingly) and sharing online purchase info with government agencies. All of this is a long-winded way of saying that an increasing number of retail locations is paramount for the health of the Canadian cannabis industry.
But there is good news! While very few locations were open in the early months of legal recreational cannabis, that number is ticking higher quickly. Particularly in Alberta. If we look at the increase in store count per province over a 2.5 month period (ending August 20th) we have seen nearly a double to 489 from 290. This has primarily been driven by additional stores added to Alberta and B.C., while Ontario is set to add an additional 50 stores it will take months for them to open to the public.
Some Provinces Have a Lot of Catching Up to Do
By itself the chart above does little to show the disparity between retail store openings, population, and where the final numbers could actually end up. We can improve our understanding of the data by incorporating the provincial population – which should be highly correlated with % of country demand. Clearly Ontario should have the most stores given it is 40% of Canada’s population. In the chart below, bigger bars are worse.
Colorado Shows the Bull Case
Now lets put this in perspective with an established market. Colorado has 454 medical centers and 571 recreational stores, for a staggering total of 1,025 stores (licences). At a population of 5.7 million people, this results in a per capita store count of one store for every 5,561 people. In other words, Colorado has 13.6x the retail store density that Canada currently has. Now, it’s worth mentioning that Colorado does have a reputation for being a ‘stoner’ State and that Colorado gets substantial weed tourism business, which inflates the need for stores and overstates Colorado’s actual consumption/demand figures. Additionally, Colorado’s neighboring states do not have legal recreational cannabis and not all of them have legal medical cannabis, which results in substantial product crossing borders. So it is very unlikely for Canada to ever reach a store concentration as high as Colorado’s.
Now, lets add the revenue portion of the equation, which begins to unearth some really interesting points. We get this retail data from Statistics Canada.
Online Cannabis Sales Have Been Very Disappointing
The first point that we can extrapolate from this data set is that online cannabis sales have been horrendous. We discussed three possible reasons for this above. The key number we are looking at is March 2019 sales data in Ontario, which was $7,682,000. The reason this number is so important is because it is the furthest date away from the launch of legalization (in October 2018) that does not include any retail sales (which began in Ontario in April 2019). In other words, its a very clean number, perhaps even slightly inflated as legal customers would have been forced into the online channel when they may have preferred online.
Consider the following math/assumptions:
- Initial estimates for run-rate demand in Canada were roughly 1,000,000 kg of cannabis, if we assume that 70% of this would eventually be sold through the legal channel that’s 700,000 kg of demand and at $10 per gram that’s $7 billion in revenue.
- Most analysts and consultants anticipated online sales would be about 30% of total demand (for example Deloitte estimated 35% of sales would be online). This means $7 billion * 35% = $2.45 billion of online sales.
- Now Ontario which has 40% of the population and should be doing 40% of the online sales sold $7.7 million in March which grossed up to all of Canada implies $12.8 million Canada wide online sales per month or $154 million annualized online sales.
- This number is just 6.3% of consensus expectations – perhaps this is contributing to the red days
We can only think of a few reasons why this might be:
- Far fewer people actually want to purchase online than initially expected, ie. data privacy mentioned above
- The legal online market is not competitive with the illegal online market – consistent with Google search results
- Supply constraints limited sales, which was definitely consistent with headlines in past months, but was not particularly consistent with the underlying data – we’ll get into this another time
- or initial demand expectations (based on survey data) were far too high
In reality, it’s probably a mix of all these reasons, but the fourth one is particularly worrying.
Average Store Revenue is $2.7 Million Per Year
Now, the second conclusion we can draw requires a rather large assumption. If we strip out the online sales from all provinces using Ontario’s March number on a per capita basis, what is left is core retail sales. This can be divided by actual store count to get an idea of the average Canada wide revenue per retail store. We can than multiple this number by the projected number of stores to get a very rough idea of where Canadian demand should eventually end up.
- We’re using May data this time as it is the most recent data, the result is removing $20.4 million of the total Canadian sales of $85.6 million, leaving an estimated $65.3 million of retail sales in May across Canada
- Using our retail store count from above (from June) of 290 results in an average store revenue of $225,000 per month or $2.7 million per year
- Of course the fewer stores there are should result in increased foot traffic to the ones that remain, inflating these figures
- This $2.7 million is about 50 kg per week per store at $10 per gram
What’s the Bull Case Revenue Scenario for Canada?
For a bull case we can assume store density in Canada equals that of Colorado. We will also assume that additional retail stores cannibalize existing store sales significantly (discount by 50%). Finally, we will assume that online sales do not increase from today and that edibles don’t improve overall store sales (we’ll get into this deeper another time).
- Final store count in Canada: 489 existing stores * 13.6x Colorado multiplier = 6,650 retail stores
- Final retail revenue: 6,650 stores * $2.7 million per store * 50% discount = $9 billion
- Add online: $154 million
- Grand total: $9.2 billion
The takeaway is that based on actual data and despite having seen very disappointing online sales, the retail data is very positive, and as store footprints expand we hope to see substantial increases in sales.