Legal weed is already a boring business, this investor says

A couple of new studies on the cannabis industry in Canada have folks wondering how big the market will become and whether all those sky-high sales projections from companies like Canopy Growth, Tilray and Cronos Group will ever be realized. Some have their doubts, including Richard Croft of Croft Financial Group, who sees legal weed becoming a more ho-hum affair.

Seemingly conflicting results emerged this week, starting with new data from Statistics Canada which showed that 38 per cent of Canadians obtained marijuana from black market sources over the first three months of 2019. That’s down from 51 per cent during the first three months of 2018, before recreational use became legal. By the numbers, 47 per cent, or 2.5 million Canadians, are now using legal means to get their pot.

Those findings might suggest that the federal government’s plan to steer cannabis commerce into regulated channels is working and that Canadian consumers are generally on board with that approach. Yet a recent poll conducted by researchers at the University of Guelph and Dalhousie University found that just 50.1 per cent of Canadians surveyed supported the federal government’s legalization of recreational marijuana, down from 68.6 per cent in 2017, while over 20 per cent of those surveyed said that they neither agreed nor disagreed with legalization, up from less than seven per cent previously.

So, more legal weed is being purchased but there’s less enthusiasm for the legal framework? Those two ideas may not be as opposed as one might think. Sylvain Charlebois of the Rowe School of Business at Dalhousie and lead author of the latter study surmised that the tempered support for the federal plan may actually be a by-product of the government’s own handiwork, saying, “A few years ago, the Liberals invited Canada to a huge party with balloons, great music, great fun – only to end up in a very boring room with classical music.”

Portfolio manager Richard Croft would agree. He claims that there may be less to Canada’s pot boom than previously hyped.

“I’m not convinced that this is going to be this great industry. To me, it’s going to end up being a lot like the liquor business,” says Croft to BNN Bloomberg on Thursday.

And while a staid and boring rollout may be favoured by the federal government whose stated aim with legalization has been to keep marijuana away from underage Canadians, it might not be the best approach if you’re a cannabis company looking to wow investors with big quarterly numbers.

Already, we’ve had mixed results. Companies like Canopy Growth and Aphria showed earlier this year in their quarterly reports that profit margins for recreational sales are already shrinking, while last month Scotiabank warned that expectations for the cannabis sector in general have been too optimistic.

More recently, a first quarter from Cronos Group came in under analysts’ expectations for revenues, with Cronos CEO Mike Gorenstein saying that his company’s top line would remain “relatively stable” over the coming quarter but that sales should pick up again in the second half of the year.