Stringent Regulations Hurting Canadian Cannabis Sector As Legal Sales Drop

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Cannabis consumption is on the rise in Canada even though figures released by Health Canada indicate a potential slowdown in sales in February. Immediate data indicates that Canadians consumed as much as 6,671 kilograms of cannabis, a 9% drop from January levels.

The slight drop in sales could be attributed to among other things fewer days in February compared to January. Supporting the analogy is the fact that daily sales of dried cannabis were up in the month by 1% to 238kg.

Another sign of a booming business in the cannabis sector is the fact that inventory levels are on the rise ahead of the much-awaited legalization of edibles later in the year. Data indicates that cannabis cultivators, processors, as well as distributors, are holding to as much as 144,470 kilograms of dried cannabis.

Amidst the high inventory levels, legal cannabis mark in the country continues to struggle with supply issues as well as packaging problems. In contrast, the black market continues to thrive behind the scenes.

Slowing Cannabis Sales

Growth appears to be nonexistent given the rate at which cannabis sales are declining after slight increases month over month in the final quarter of last year. Following the launch of adult use in October, sales in the month surged to $32 million before increasing to $39.6 million in November and finally $41.6 million in December.

However, sales appear to have taken a hit in January on dropping to $39.7 million compared to $41.6 as of December.

A decline in cannabis sales month-over-month should be a point of concern given that the Marijuana sector is supposed to be one of the fastest growing industries. Recreational use legalization was supposed to open up the market as well as sales channels.

Regulatory Hurdles

Part of the decline in sales stems from regulatory hurdles. Health Canada, which is tasked with regulating the burgeoning sector, is sitting on a backlog of more than 800 applications of entities looking to offer cannabis products.

With the enormous backlog it means growers as well, entities who were supposed to be selling cannabis are not doing so, something that appears to be fuelling the black market given the lack of supplies.

Stringent packaging requirement has also hurt sales. Health Canada requires cannabis companies to package their products in child and tamper resistant packs.

There are also regulations on branding, labeling and packing design that appears to have made it difficult for entities to get more products to the dispensary as well as the market.

The stringent regulations have essentially triggered supply shortages to the legal cannabis market as very few cannabis suppliers can meet the requirements. Long lines in accredited facilities high prices are the other bottlenecks working in favor of the black market.

 

Aphria Inc. (TSE:APHA) has already confirmed that it sold fewer kilograms of cannabis in the latest quarter ended February, due to supply shortages as well as packaging and distribution challenges. Canopy Growth Corp (TSE:WEED), which is the largest pot stock, also continues to feel the effects of supply shortages, something that could affect sales going forward.

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