Cannabis has been legal in Canada for the past number of years, and since then there has been significant growth in the number of companies covering all aspects of the supply chain. This includes but is not limited to growers, distributors, retail outlets, producers (infused products), and even pharmaceuticals. All of this aspects of the supply chain have one main thing in common which is they are all dependent on one thing and that is they all need the actual cannabis.
In the early days of legalization growers were producing as quickly as possible, and some were found cutting corners to increase grow capacity but found ended up in non-compliance with Health Canada regulations over non-regulated grow rooms ( see: Pelham cannabis grower knocked by Health Canada ). Today according to the Government of Canada there are currently 733 licensed companies for the sale, cultivation, and processing of Plants/Seeds, or Dried/Fresh Cannabis, while in 2015 there were 22. That’s a 3300% growth in 6 years.
With this rapid growth it is hard to believe the long term industry can sustainable this. In time it is likely we will see consolidation in the market, some company will be bought out, some will go under, while others will prosper. Regardless, I am long-term bearish on the industry and will invest in it for the following 3 reaasons.
Retail Saturation
Where I live, there is almost literally a retail store on every street corner. To put this into perspective, within a 3 block radius from my house there are 9 Tim Horton’s, and 13 retail cannabis outlets. There is only so many people that actually use cannabis (not like there is more cannabis users then coffee drinkers), but I certainly do not think the demand and market are at the point where we need one on every corner. This will only lead to increased competition and lower prices.
Grow At Home
In Canada it is legal to cultivate 4 plants per household. With an average yield of 17.5oz per plant that totals roughly 70oz per for all plants. That’s like a grocery bag full of cannabis. So what is someone going to do with that much? I knew someone that grew one year and once all was said and done they said they had enough to carry. You can only smoke so much of it, maybe some cooking and baking if you are creative, or give it away, but there is literally so much you do not know what to do with.
The Underground Market
Even though cannabis is now legal in Canada, there always will be the underground market. As the underground market is not the most reputable they have one key advantage and that is, they always have the ability to undercut their competition in terms of price. If a retail store sells a half-quarter for $40 plus tax, they can always sell it for $30 – $35 (or cheaper) all in.
This is just my perspective and investing style (not financial advise), and I do recommend that everyone do their own due diligence before investing in a company.
