Canopy Growth maintains high hopes for legal cannabis market, even as COVID-19 spreads

Cannabis

Ottawa-area pot producer Canopy Growth Corp. sees the global legal cannabis market growing to be worth $70 billion in the next three years, even as it faces challenges caused by the COVID-19 pandemic.

David Klein, the Smiths Falls-based company's chief executive, said the market is already valued at $10 billion, but that number will steeply increase as more people try out legal cannabis, customers abandon the illegal market and additional stores open in locations like Ontario.

"Canada is expected to be about four times the size that it was in 2019, U.S. cannabidiol six times and Germany about 10 times. These are all by the time we get to 2023," Klein said.

His remarks came during an investor call Canopy held Monday to discuss the company's outlook and how it has been handling the pandemic.

After stores closed down and many employers transitioned their staff to work from home because of COVID-19, Canopy announced in mid-April that it would lay off 85 full-time workers and close its indoor facility in Yorkton, Sask. to align its production in Canada with market conditions.

It had already cut 500 employees, closed some of its greenhouses and taken writedowns of between $700 million and $800 million in March as the pandemic started to spread in Canada.

Canopy's chief financial officer Mike Lee indicated on Monday that the troubles aren't over.

"We continue to expect gross margin pressure in the coming quarters, given that 50 per cent of our production costs are fixed," he said.

"While we work through COVID-19, we are experiencing some lost economies of scale as a result, so we expect our gross margins to be below 30 per cent during this period of pandemic."

The company was previously aiming for gross margins of 40 per cent.

Lee said he is slowly seeing the industry rebound from the pandemic and Canopy's performance in Canada's recreational market has improved "modestly" in recent weeks as brick-and-mortar stores reopened.

However, Canopy won't be taking any chances, according to Lee.

"We continue to take measures to limit our spending and flex down our staffing and defer or cancel altogether any non-binding commitments where we can," he said.

In the coming months, Canopy will take a deep look at the company's offerings and reduce some of their SKUs because roughly 30 per cent of them have accounted for 80 per cent of its Canadian recreational shipments.

Canopy's low-performing SKUs are taking away from opportunities to take advantage of demand for more popular products, said chief product officer Rade Nikola Kovacevic.

"We've missed opportunities to capture $20 million in sales in Q4 alone due to product availability issues," he said.

Canopy will also focus on continuing to battle the illegal market by dropping prices and by courting new consumers with edibles and other new product categories – including gummies, chocolates, beverages – introduced to the Canadian market in January.

Canopy says the new products accounted for 25 per cent of its total recreational sales in May in Ontario.

It found beverages are grabbing a growing slice of the market, which was valued at 28 per cent of combined edible and beverage sales that month.

More than 530,000 units of Canopy's Tweed Houndstooth and Soda, Bakerstreet and Ginger, House Plant and Deep Space beverages have been shipped to date and the company is doubling weekly producing runs of the drinks and cannabis-infused chocolate to meet demand.

Martha Stewart CBD products will be rolled out in the U.S. in the fall, first for human consumption and then for pets.

Canopy's line of gummies will launch by the end of fiscal 2021.