The numbers are in, and man, were a lot of people wrong.
Lofty estimated sales are nothing new to the investing world, especially in high-growth, untested markets.
However, the latest data from the Canadian government is forcing industry analysts to throw out all of their projections.
A perk of the highly regulated marijuana industry in Canada is the highly accurate data that is being published about it by the government.
Part of that includes monthly sales figures, and the latest — for December — are out.
Here is what we’ve seen so far:
- October 2018: C$43.1 million (US$32.7 million)
- November 2018: C$53.2 million (US$40.4 million)
- December 2018: C$55.2 million (US$41.9 million)
Sales looked strong in October, when there were only two weeks and stores were selling out shortly after they opened.
Since that initial burst of pent-up demand, we’ve seen sales grow at a far slower pace than anticipated.
Based on December’s sales, an estimated annual rate comes in at around C$650 million, or US$500 million.
Granted, that is only two and a half months’ worth of data, but that is a fraction of most estimates that fell in the $1 billion to several-billion-dollar range.
So what gives, and why is this massive opportunity in the face of sales falling so short of expectations?
The answers to these questions are closely related.
It’s all about the supply. Namely, the artificial barriers in place to moving supply to demand.
Growing pot is incredibly easy. There is a reason why it is called weed. Getting properly licensed by the Canadian government to grow pot is not.
Health Canada, the agency in charge of the process, is throwing up an incredible amount of red tape and is taking ages to process applications.
About a year ago, there were 500 cultivation sales applications waiting for approval. Many of these were looking at up to a year or more to get an answer.
The average time between application and approval or rejection was up to 341 days.
Even companies that were established in the medical marijuana business in Canada were looking at massive delays before they could plant anything in new facilities, or expand existing ones.
So far, there is no sign of any effort to reduce the long waits or address the struggle that potential businesses face as they wait for word on whether or not they are allowed to exist.
Then there are processing issues. A lack of licenses to process marijuana and insufficient regulatory compliance in packaging has hindered companies moving their product into stores.
Then there are provincial issues that are slowing down retail dispensaries. In Ontario, you can only buy marijuana online, though 25 retail licenses are expected to be issued by April.
That is nowhere near enough for the most populous province, and the home to both Ottawa and Toronto. That probably isn’t even enough for the two cities’ metropolitan areas.
That opens up the opportunity for us. Existing companies can buy out or merge with each other to absorb the hard-won regulatory approval and licenses of others.
A massive amount of pressure is on the largest companies to capture as much market share as they can. Their share prices and revenue for future expansion depends on it.
How can they possibly justify waiting up to a year to build out their operations? Especially when they’re flush with investor money just waiting to be utilized?
In short, they can’t. They will be all but forced to pursue the best buyout targets and pay a hefty premium for shares.
And they aren’t just competing with other marijuana companies. A wave of big businesses is hunting for the best companies to buy out to get a foot in the door as well.
Look no further than the C$5 billion shelled out by Constellation, hundreds of millions of dollars from Molson Coors, and endless rumors of pending deals by Diageo, Anheuser-Busch InBev, Guinness, and Coca-Cola, just to name a handful of the big ones.
That’ll only serve to drive up buyout prices to nosebleed heights for these companies.
For those who own the shares of these buyout targets, a big payday is on the horizon.
