Canadian Cannabis Compendium

THE TD COWEN INSIGHT

Herein we provide a detailed 2022 Year in Review for Canadian cannabis, breaking down LP performance and brand share across form factors and key provinces. We decrease our legal 2023 TAM by ~12%, to C$6.9 bn (including medical and taxes), primarily due to continued price deflation. We look for stock performance to be driven by share consolidation and profitability improvements.

A CAUTIOUS OUTLOOK FOR CANADIAN LEGAL CANNABIS IN 2023

After examining 2022 cannabis incidence rates along with retail and wholesale sales from Statistics Canada, supplemented with Hifyre data, we lower our 2023 Canadian legal TAM by ~12% to C$6.9 bn (including medical and taxes). Despite the continued migration of consumption over from illicit channels, excess supply and DD price deflation have led to an increasingly challenging operating backdrop. This leaves us incrementally more cautious about the outlook for 2023.

ESTIMATING LEGAL TAM IN CANADA

Our proprietary model for the legal TAM in Canada, which came within ~3% of the C$4.5 bn adult-use retail sales reported by Statistics Canada in 2022, is a bottom-up approach based on incidence rates, pricing, average consumption, and illicit mix. Our ~12% downward revision to our 2023 legal TAM is driven primarily from a reduction in our pricing outlook.

NOTICEABLE SHARE GAINS FOR THE LEGAL CANADIAN CANNABIS MARKET IN 2022

The continued deflationary environment has driven noticeable share gains for the legal market, which we estimate was 63% of the total in 2022. 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.

WHAT TO WATCH IN 2023

We are watching a few things in 2023:

1. increased market consolidation as LPs look to opportunistically increase overall or category-specific market share (e.g., TLRY) away from cash-strapped operators
2. continued SKU / brand rationalization but also a continued emphasis on innovation and budtender engagement
3. potential further reductions to mark-ups by other provincial boards (led by the OCS) and associated impacts to LP profitability.