Hexo eyeing private label strategy as it charts U.S. expansion

Cannabis leaves
Cannabis leaves

Hexo Corp. is mulling a private label strategy as part of its U.S. expansion.

The chief executive of the Ottawa-based cannabis company said Thursday that he’s considering approaching multi-state operators in the U.S. to partner on Hexo-powered private label brands.

According to Sebastien St-Louis, that arrangement would leverage Hexo’s technology to help multi-state operators boost their product quality and margins while lowering costs.

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“That requires more regulatory evolution, so that’s not a today strategy, but it’s a very rapid evolution,” he said while speaking at a farm-to-market investment conference BMO Capital Markets hosted. “We are in the early innings.”

The insight into Hexo’s strategy comes as Canadian cannabis companies are beginning to plot U.S. expansions in hopes that the market will soon federally legalize cannabis, which Senate Majority Leader Chuck Schumer has been pushing for.

Hexo’s rivals, including Smiths Falls-based Canopy Growth, Aurora Cannabis and Tilray, have all indicated that they’re increasingly eyeing the U.S. market and many have been on an acquisition spree to prepare themselves for that move.

New facility in Colorado

Hexo recently signed purchase and sale agreements for a 50,000-square-foot cannabis production facility in northern Colorado.

The company will use the facility to give U.S. consumer packaged goods brands access to Hexo’s technology, which it’s been using to drive down the costs of cannabis in Canada and create more products priced at the same levels of pot sold through the illicit market.

Hexo boasts that its Bake Sale brand, for example, has one of the lowest prices per gram in the country and in some cases, is 20 per cent lower than competitors’ products.

Hexo created Bake Sale because it found illicit market customers, which once made up 80 per cent of cannabis sales in the country, were paying between $80 and $145 per ounce of pot, said St-Louis.

By his calculations, legal cannabis producers were selling cannabis at $400 per ounce, which was “not really providing value to consumers.”

“Now we’ve gone after that $80 price point, which is the bottom of black market,” said St-Louis. “This is the death knell for black market flower.”

Hexo will keep facing off with the illicit market in hopes that it will help the company reach its goal of holding a top-two position in Canada for adult-use cannabis sales.

The company sits in the third position, St-Louis said earlier this week when Hexo announced it was acquiring 48 North Cannabis.

Hexo was attracted to the company because of its cosmetics offerings, which include body oils and creams, bath salts and even intimacy oils.

Hexo was lacking in that range of products and believes buying 48North will give it more experience and credibility with consumer packaged goods brands, said St-Louis.

Tilray growing market share

Earlier this year, Hexo announced it would buy pot company Zenabis Global for $235 million.

Many of Hexo’s competitors have adopted similar strategies linked to acquisitions in recent months.

Canopy Growth snatched up Supreme Cannabis and Ace Valley Cannabis. Meanwhile, Sundial Growers said it will buy Inner Spirit Holdings, while Tilray and Aphria merged.

The new Tilray will have a pro forma revenue of $874 million and will control more than 17 per cent of the retail cannabis market ​– the largest share held by any Canadian licensed producer.

Hexo’s chief financial officer Trent MacDonald said Thursday at the conference that the merger has created “quite a gap” between Tilray and other cannabis companies.

“While we are growing organically at a very high pace, it is going to be difficult to make up that gap,” he said.

“I think everyone is looking at how to get into a top-three, two, maybe one (position) against that combination, so mergers and acquisitions are going to be important.”

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