Canopy Growth’s Dwindling Market Share

Major Take-Away: Canopy’s epic stand against a rapidly rising tide

In the four quarters since recreational cannabis was legalized in October 2018, the amount of cannabis sold in Canada (in kilograms, including both recreational and medical) has increased by 81%. Meanwhile, sales by the industry’s largest player have increased by only 8%.

Why It Matters: Market dominance is Canopy’s major appeal to investors

Canopy’s investor deck and financial reports heavily feature terms like “market leadership,” “driving the [global/medical/rec/retail/etc.] cannabis market” and even talk about “digging our economic moat.” They burned through 1.3 BILLION dollars in cash last quarter and are astonishingly unprofitable. The only plausible way to justify this is if they are investing in future profitability through the development of dominant market share and associated market power. In that context, bleeding market share isn’t likely to get voted the best look at the ball.

Moreover, management’s messaging around their most recent (and arguably catastrophic) quarter focused on the anemic roll-out of Ontario’s retail cannabis stores. Although the facts that Canopy is citing here are true (there is currently about 1 retail cannabis store for every 600,000 Ontario residents), the graph above calls into question those facts’ relevance. What makes Canopy think that stores opened in Ontario will help them sell more product? To date, the opening of retail stores has helped the Canadian cannabis market as a whole explode; yet it seems to have made precious little difference back home in Smith Falls.

Details and Data Sources

The information for kilos sold per quarter by Canopy comes from their quarterly reports (kilos sold and harvested can be found in the MD&A rather than the financials). Market size data comes from Stats Canada, which receives data directly from Health Canada. To be licensed as a legal participant in the cannabis market, you need to take part in seed-to-sale tracking and provide Health Canada with regular activity reports. As a result, cannabis market data (for the legal market, anyway) is far, far more accurate than estimates of other industries.

With that said, there are two caveats. First, at the time I am writing this, Stats Canada has not yet posted the sales data for September 2019 (the third of the three months that comprise Q3 2019) so I was forced to impute it. I did this by using the same growth rate from July 2019 (13,159 kg) to August 2019 (14,589 kg) for a growth rate of 11% and an estimated sales volume for September 2019 of 16,175 kg. It’s worth noting that the market share estimate that I came up with for Canopy sales using this methodology (25%) is the same as was cited by Canopy management during the investor call they held when they released their earnings for that quarter.

The second caveat concerns the equivalence between cannabis oil and dried cannabis. Stats Canada reports sales of dried cannabis separately from sales of cannabis oil. As a result, to get the scale of the cannabis market as a whole, you need to convert liters of oil to the kilograms of dried cannabis required to produce it. Each company in the industry has different processes and different inputs that they use for oil manufacturing, and so the conversion rate is not standard. Canopy’s stated conversion rate (found in their financial reports) is 5 mL/g (i.e. from one gram of dried cannabis they can manufacture five milliliters of cannabis oil). Others are higher, some north of 7 mL/g. I wanted a conservative estimate of the market (which makes Canopy’s market share bigger), so I went with a conversion rate of 7 mL/g. Regardless, the effects of changing this conversion rate are not substantial. A 5 mL/g conversion rate changes Canopy’s Q4 2018 market share from 42% to 40% and changes Q3 2019 market share from 25% to 24%. No matter the conversion rate, the basic and unflattering pattern in the graph above is unchanged.