Manitoba cannabis giant Delta 9’s cost-cutting measures are symptomatic of financial struggles across the industry.
The Winnipeg-based company recently announced it would lay off approximately 40 staff and reduce its cultivation capacity by about 40 per cent. The board and executive have also taken a pay cut, Delta 9 said in a Jan. 9 news release.
“The cost savings are expected to reduce operating costs by $3 million to $4 million in 2023,” said CFO Jim Lawson, referencing the current market environment.
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Why it matters: The cannabis boom is turning into the cannabis bust.
That environment is one of stiff competition and compressed prices, said George Smitherman, president and CEO of the Cannabis Council of Canada.
“The regulated cannabis environment has been successful as a matter of public policy in many ways, but it has not been very economically successful,” Smitherman told the Co-operator. “Companies large and small are threatened by viability.”
The sector has seen “extreme price reduction” since legalization, Smitherman said.
The Ontario Cannabis Store, the province’s legal online retailer, is one of the largest buyers of cannabis in the world, Smitherman said. As such, it can act as a price-setter. This and overall huge demand for weed in Ontario has compressed prices as cultivators try to get into that market.
Because of the price drop, the excise tax producers pay on their crop has become incredibly onerous, Smitherman said. The federal government intended the tax to be no more than $1 or 10 per cent of the producer’s price per gram, but that was based on producers selling for $10 per gram, he said. Today, they may get $3 per gram and pay more than 30 per cent in taxes.
As a result, many producers are behind on or can’t pay their taxes, Smitherman said.
Growers are also under pressure to evolve to suit consumers’ tastes, said Adam Carritt, whose family owns Prairie Trichomes, a craft cannabis cultivator and retailer in rural Manitoba.
Consumers want higher and higher THC levels, the active ingredient in cannabis.
“It’s hard to keep up, and it’s hard to keep your costs under control while you’re chasing that,” Carritt said.
Prairie Trichomes recently laid off its two staff members because of financial challenges. Cultivation under strict legal guidelines is tough, Carritt said, but financial troubles made things worse.
“Everyone that I’ve spoken to at the cultivation level, they’ve all experienced the same thing. It’s hard to get money back (from processors.)”
He thinks this is because processors are also struggling.
“We are making ourselves smaller and smaller so that we can survive whatever the industry throws at us.”
The federal Cannabis Act is under review. In a submission to the government, the council asked for revisions to the system of taxation, mark-ups and fees.
“We think they could lessen the load on the shorter term with a view towards collectively growing the pie,” Smitherman said.
He added that cannabis sales are split about half and half with the illicit market (though he said that is based on shaky data) so there is a lot of room to bring consumers into the legal market.
The council asked the government to clamp down on illegal sellers, who brazenly sell online. It also asked for more leeway to talk with consumers about the effects and attributes of their products.
This would also allow for more discussion on safe consumption, Smitherman said, and could reduce adverse reactions to cannabis.
Carritt added that, due to the sweeping nature of the Cannabis Act, its regulations are difficult to apply precisely at the grower level.
He also raised concerns that economic hard times would push all but the most well-financed operations out of business and reduce diversity of the industry.
