Canadian Cannabis Compendium

THE COWEN INSIGHT

Herein we provide a detailed 2021 Year in Review for Canadian cannabis, breaking down LP performance and brand share across form factors and key provinces. We decrease our legal 2022 TAM by 1.8% to C$6.3 bn (including medical and taxes), primarily due to lower incidence and continued price deflation. We expect a highly fragmented adult-use market and price deflation to endure, suggesting continued consolidation opportunities in 2022.

Cannabis Investment Opportunities

From examining 2021 cannabis incidence rates along with retail and wholesale sales from Statistics Canada, supplemented with Hifyre data, we lower our 2021 Canadian legal TAM 1.8% to C$6.3 bn. In spite of the continued migration of consumption over from illicit channels, the lower incidence in 2021 along with the continued DD price deflation, coupled with an even more fragmented market, makes us remain more favorable on the U.S. market for investment opportunities.

Our proprietary model for the legal TAM in Canada, which came in within ~70 bps of the C$3.9 bn adult-use retail sales reported by Statistics Canada in 2021, is a bottom-up approach based on incidence rates, pricing, average consumption and illicit mix. Our 1.8% downward revision to our 2022 legal TAM is driven primarily from 2021 incidence data from Health Canada’s 2021 survey coming below our estimates by ~280 bps for past year and ~150 bps for past month.

Financial & Industry Model Implications

The continued deflationary environment has driven noticeable share gains for the legal market which we estimate was 56% in 2021. We expect these gains to continue as prices, specifically for flower, remain depressed, from increased value and larger format offerings, which in turn should drive incremental migration into the legal market.

Key Catalysts in 2022

We are watching a few things in 2022:

  1. increased consolidation in the market as LPs look to opportunistically increase overall or category-specific market share in a fragmented market
  2. continued rationalization on both the SKU and brand level, as well as the store level, as LPs look to right-size their cost structures and improve cost efficiency and store productivity
  3. the impact of the proposed increase of the purchase limit for beverages from 5 standard cans to 48 on both LPs that lead in the category  and category growth
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