Over half of cannabis companies didn't meet board expectation in 2022

Over half (58%) of cannabis companies underperformed board expectations in 2022, according to EY’s first annual Global Cannabis CEO Survey. The report polled nearly 50 private and public cannabis company C-suite execs in the Americas, Europe, and Australia in December 2022 and January 2023.

Cannabis companies have struggled with the impacts of intense competition, price and margin pressure, and complex regulations. Canada – one of the earliest jurisdictions to legalize recreational cannabis – has already seen its own cannabis bust as sky-high market projections have failed to materialize.

Canopy Growth Corp., one of the country’s largest producers, earlier this year announced it would be laying off 35% of its workforce and closing one of its facilities in Smiths Fall, ON. A November 2022 report from law firm Miller Thompson estimated Canadians who have invested in cannabis companies have lost more than $131 billion.

Cannabis firms have highlighted the difficulty of competing on price with a thriving illicit market. A hot-button issue is high excise taxes, which firms argue have become too costly especially after years of persistent heavy inflation.

“Last year was riddled with industry-specific challenges, exacerbated by inflationary pressures and limited capital availability,” said Rami El-Cheikh, head of the EY Americas Cannabis Centre of Excellence. “Although cannabis executives are anticipating another wave of intense hurdles with persistent inflation, ongoing competition, pricing compression and margin pressure, companies that have established strong foundations are confident that they’ll weather the storm.”

The top risks to growth identified by global CEOs were excessive competition (76%), ongoing pricing pressure (73%) and scarcity of capital (42%).

Nonetheless, 42% of cannabis leaders still expect a high-growth economic scenario for the industry in 2023, with growth projections exceeding 5% over 2022.

According to figures from StatsCan, Canadian consumers spent $4.52 billion on regulated cannabis in 2022, growing 17.9% over $3.83 billion in 2021. The growth is largely attributable to a growth in licensed stores, though the pace of store openings is set to slow in the future.

EY’s survey found that half of cannabis CEOs plan to maintain or reduce capital investment this year, with some anticipating opportunities from competitor exits and new markets in Germany, Israel, and Australia. El-Cheikh cautions that “M&A activity should only be considered in select cases where companies have built a strong enough foundation to confidently realize rapid cost savings and revenue synergies.”

Over half of executives told EY their companies will require funding or financing in the next 6-12 months to sustain operations, fund innovation, and drive M&A. EY expects cannabis firms to use tight cost controls and stringent working capital management to maintain cash flows, especially as interest rates remain high and investor appetite for the sector cools.

“The year ahead will force many companies to either exit the industry or become exceptional operators, executing efficiently with resolve, grit, and a value-oriented mindset,” added El-Cheikh. “In this new normal, flawless operational execution and financial management should be top of mind.”