Jul 26 2019
In October 2018, Canada became the second country in the world and first in the G20 economy to legalize nonmedical use of cannabis for adults following the implementation of the Cannabis Act. Both the Canadian government and its consumers have capitalized on favourable trends in the public perception of marijuana by expanding cannabis availability and increasing consumption, respectively. As the fastest growing industry in Canada, IBISWorld estimates that the Cannabis Production industry in Canada (IBISWorld report 11141CA) will grow at an annualized rate of 102.7% over the five years to 2019 to total $1.5 billion.
Expanding upon our previous articles which covered the legalization and rollout of cannabis legislation, this update shares how consumers, provincial governments and industry enterprises have responded to the challenges and opportunities of legalization.
Budding consumer demand
Following the recent legislation, cannabis consumption blossomed, driving industry revenue growth. According to Statistics Canada, Canadians are increasingly using cannabis since its legalization. As accessibility increased in the first quarter of 2019, 18.0% of Canadians aged 15 years or older, an estimated 5.3 million people, reported using cannabis, a 14.0% increase from the first quarter of 2018.
Since recreational marijuana is generally considered a discretionary purchase, the industry has benefited from rising per capita disposable income, which increased at an annualized rate of 0.9% over the five years to 2019. The rapid development of cannabis derivate products (e.g. oil, topical solutions, edibles), provided consumers more options for how to use the drug, driving increased consumption. However, government oversight has prevented many Canadians living in the country’s most populous provinces from accessing the drug through legal channels.
Despite increasing per capita cannabis consumption across Canada, supply constraints and strict regulations in certain provinces have hampered growth. For example, Québec, Canada’s second-most populous province, has been slow to roll out industry establishments amid a cannabis shortage. Only 16 establishments currently operate in the province because the Société québécoise du cannabis (SQDC) has struggled to grow, harvest, cure and process enough cannabis to satiate Canadians’ growing demand.
After slashing its operating hours by nearly half in October 2018, SQDC announced in May 2019, it would return to being open seven days a week. The SQDC also plans to open nearly 30 stores by the end of March 2020. Similarly, the Alcohol and Gaming Commission of Ontario (AGCO) only authorized 25 establishments to retail cannabis following initial legislation. However, in response to overwhelming demand, the AGCO announced plans to hold a lottery for 42 new licenses in August. Comparatively, Quebec’s and Ontario’s store limits contrast with Alberta’s approach, which is anticipated to authorize more than 200 establishments by the end of 2019.
For decades, a single Health Canada-affiliated producer, Prairie Plant Systems Inc., now CanniMed Therapeutics Inc., remained Canada’s sole legal provider of medical cannabis. In 2013, the Marihuana for Medical Purposes Regulations permitted private companies to apply for a medical marijuana production and distribution licences, prompting a flurry of entrants into the industry. Several years later, the Cannabis Act prompted a flurry of newfound enterprises to enter the industry and undertake the capital expenditures necessary to develop an agricultural, processing, distribution and retail infrastructure for the cultivation and sale of cannabis products to the consumer market.
Notably, the number of industry enterprises is anticipated to increase at an annualized rate of 54.7% to 204 operators over the five years to 2019. Major players including Tilray Inc., Aurora Cannabis Inc. and Aphria Inc. , which collectively accounted for an estimated 51.2% of industry revenue in 2018 (latest data available), quickly expanded through robust acquisition-focused strategies and the rapid development of production facilities. Despite strong downstream demand, compliance costs and significant initial capital outlays have made it difficult for operators in this emerging market to generate profit as industry operators create the infrastructure that will enable returns in the long run. However, IBISWorld expects industry expansion to continue at an annualized rate of 41.4% over the five years to 2024 to 1,153 enterprises as supply constraints ease and provincial governments continue to award licences to new companies.
Looking for more coverage on North American cannabis production? Check out our previous Industry Insider article on cannabis legislation in Canada!
Edited by Vicky Wolak, Lead Editor
Infographic Design by Stephanie Conte, Senior Editor & Editorial Team Lead