The cannabis industry is maturing, but after a tough 2023 challenges remain for companies and investors.
In Canada, the sector continues to go through a much-needed rightsizing, while in the US all eyes are on reform. Looking further afield, international markets are gradually changing legislation surrounding the drug.
Rightsizing to continue in Canadian market
Butt said he is observing this trend on the supply side of the sector. “The infrastructure that was created for a massive oversupply is now being rightsized. The industry has seen that producers were way too far ahead in terms of demand anticipation (when the infrastructure was created), and now they’re starting to get to a size where equilibrium between supply and demand can be reached, which causes a healthier industry,’ he noted.
Butt believes this trend will continue into 2024. And while bankruptcies and M&A may persist as well, he doesn’t believe there will be as much as there has been over the last two years, at least not in Canada. “A lot of the weaker players have been weeded out, for lack of a better word. We’re already in a place where it’s a tight group that has market share and control. And from here on, they seem to be fairly well capitalized for the next phase of growth as well. So even though there will continue to be a further rightsizing of the market, the majority of that is behind us,’ he said.
Stateside, the landscape looks much different. “In the US, it’s really a question of how quickly regulation can change, because that is the lifeline that many smaller producers are hoping for. If there is no material progress, then you could see more bankruptcies take place. There is the opportunity to have small M&As, but a lot of the companies that are willing to sell here have pretty unattractive capital structures,’ said Butt.
Access to capital a big US market concern
When it comes to catalysts within the cannabis market, Rami El-Cheikh, corporate strategy partner at EY-Parthenon, pointed to limited access to capital markets as one of the biggest concerns facing the US market.
“I think there’s going to be more acceleration of bankruptcies and restructurings in 2024. I think the balance sheets are very stretched. So that’s going to be very problematic, and (even though) a lot of the cannabis companies have been very active with their cost-reduction programs, I don’t know to what extent they can further reduce costs and further streamline their operations. They’ve been at it for about a year or two years now. So without improved capital markets (or) competitors exiting the market, it’s going to continue to be a challenging, challenging industry.”
Butt echoed El-Cheikh’s statement. “(Limited financial access) is also concerning for producers because … it really becomes a world of haves and have-nots; it takes away a level playing field and really gives the advantage to those that have lots of money in their coffers, and turns the structure more into an oligopolistic structure rather than a (truly) competitive market, which is not good for consumers at the end of the day,’ he said.
2023 saw a few US operators apply to list on Canadian exchanges, which would increase their visibility and unlock access to capital from foreign investors. If their moves prove successful, more US operators may follow suit in 2024.
US election could politicize cannabis sector
With Minnesota, Ohio and Delaware all passing laws to legalize the adult use of cannabis in 2023, and the US Department of Health and Human Service recommending that the US Drug Enforcement Administration reschedule the drug, it’s clear that public opinion on cannabis legalization is changing quickly. As the US enters the 2024 election cycle, the industry could take center stage as politicians look for ways to build platforms that resonate with voters.
However, Butt does not believe politicizing reform will be good for the US cannabis market. “(Politicization) could stall the progress that has been made so far, and really leave investors (and operators) out to dry. It could put them in a little bit of limbo as they figure out how to navigate the waters of limited financial access and growing underlying markets.”
The advancement of the SAFER Banking Act seemed like a promising sign when it was voted on back in September. “Certainly the scenario now is very different than it was three, four or five years ago,” noted Butt.
“(However),’ he added, ‘We are sitting in a scenario where the House is now controlled by Republicans who might not want to give Democrats a win. So political posturing is going to be front and center for the future of the SAFER Act, at least within the next 12 months going into the election cycle.”
Global cannabis market growth to continue
Cannabis legalization is spreading. Countries in South America, Asia and Europe are considering some type of cannabis reform, possibly in 2024. As regulatory changes create investment opportunities around the world, it’s likely the demand for cannabis in these untapped markets will grow. In fact, according to Grand View Research, the global cannabis market is projected to grow at a compound annual growth rate of 25.5 percent between 2023 and 2030.
“Germany has been working through the challenges of how to stage the proliferation of cannabis … and the holes that were left with the Canadian blueprint are being stitched by the German regulation that’s developing,” said Butt.
Major cannabis companies Tilray Brands, Curaleaf Holdings (OTCQX:CURLF,CSE:CURA), Cronos Group (NASDAQ:CRON,TSX:CRON), Organigram Holdings (NASDAQ:OGI,TSX:OGI) and Aurora Cannabis (NASDAQ:ACB,TSX:ACB) have all expanded into the German market in 2022 and 2023.
The bottom line
The cannabis market has been tough for companies and investors over the last few years, but there is some optimism that 2024 will bring much-needed action that will allow the industry to realize its full potential. And as regulation changes around the world open the door to new opportunities, the global market could be poised for significant growth.
Securities Disclosure: I, Meagen Seatter, hold no direct investment interest in any company mentioned in this article.
