March 8, 2022 admin

Cannabis North of the Border: Shifting consumer preferences and oversupply issues could lead to write-downs and impairment charges

Just over three years since adult-use cannabis was legalized in Canada, the Canadian cannabis market has experienced its share of rise and falls, with the Cannabis Index reaching its post-legalization high in Q2 2019 then generally consistently declining in 2020, 2021, and the first two months of 2022. Just about six months before the global shutdown for COVID-19, the Canadian cannabis market was pushing ahead with product innovation and the launch of Cannabis 2.0, and despite the pandemic that progress has continued.

Cannabis 2.0 brought new products into the Canadian market, such as cannabis-infused edibles, vape pens, and topicals, shifting away from traditional dried flower sales. For instance, according to Statistics Canada (as reported by MJBizDaily), “By the end of March 2020, dried flower’s market share had fallen to 81% of sales, then further to 77% by the end of June, and 76% by the end of September,” with Cannabis 2.0 driving retail sales.

The switch in product mix and innovation saw several new alternatives flooding the marketplace as retail sales continued to grow, which may have created inefficiencies in marketing as efforts were spread too thin and not focused on a particular product. This phenomenon could potentially limit brand loyalty, as cannabis companies focus on increasing volume rather than targeting particular products. The advent of new products also saw new producers enter the Canadian cannabis market. As of this writing, a government database showed over 800 authorized licensed cultivators, processers, and sellers. In October, BNN Bloomberg called the number of companies licensed to sell or process cannabis in Canada “a staggeringly high figure that many industry observers and analysts alike believe contributed to the oversupply of legal pot in the market.”

Based on our experience, the shifting and rebalancing of consumer preferences, coupled with the oversupply in the Canadian cannabis market, could result in write-downs of products as licensed producers continue to reduce prices, resulting in negative profit margins. Negative margins could be an impairment trigger for a business’s licenses and could result in the write-down of goodwill if they persist.

Canadian cannabis companies should pay close attention to industry trends and oversupply issues that could result in negative profit margins and possible goodwill impairment charges as they prepare their annual financial statements. U.S. cannabis companies should also keep a close eye on industry trends
across the different states which have been plagued with similar oversupply and changing consumer preferences.

For more information and how we can support you, feel free to reach out to Davidson’s Cannabis Team at davidson@davidson-co.com.