Leadership Change in the Cannabis Industry
Like many industries these days, cannabis industry news is usually grim but with the occasional silver lining. In spite of this pandemic, retail sales are generally up and the new consumables categories are being very well received by consumers. On the other hand, most of Canada’s top producers continue to do not so well at all.
The Financial Post reported last month that an analysis of 33 firms tracked by Marijuana Business Daily showed that eight of the biggest Canadian companies do not have the funding to last more than the next ten months. “It’s going to be an extinction-level event for some companies,” said Craig Behnke, an equity analyst at Marijuana Business Daily. “But it’s a healthy and necessary process for any industry to go through once it’s had a phase of absolute excess and exuberance.”
But what really happened?
The head-spinning rate of mergers and acquisitions among industry players first began when Canopy Growth purchased Mettrium Health for $430 million in 2016. It escalated with the forecast demand of the recreational market commencing in October 2018 and again with Cannabis 2.0 in October 2019. During this time global medical markets continued to expand with an unprecedented demand for all things cannabis. Rather than growing their businesses organically, producers responded by acquiring more and more facilities and production capacity.
Fueling these acquisitions were the billions of available investor dollars to license and build grow space. According to Health Canada, 1.4 million square meters of greenhouse and outdoor grow space had been allocated to cannabis crops by January 2020. Cannabis is now the fourth largest greenhouse crop in Canada – after cucumbers, peppers, and tomatoes.
In another Marijuana Business Daily article, Mat Lamers reports that much of the collective $6 billion CAD net loss incurred by the industry last year can be blamed squarely on its executive leadership. He states that the buying frenzy of the past years was not based on a realistic assessment of the market but was built primarily on stock promotion - that a generation of leadership focused more on raising capital than on actual business management.
It was clear that a new approach was needed to move away from 2017’s expansion activity to 2020 profitability. Deepak Anand, CEO of Materia Ventures, observed, “There’s over 300 license holders currently, and the question now is what your profitability looks like… That takes a whole other skill set, and it’s nothing against the original CEOs and founders because, in hindsight, they did their jobs.”
Apart from promoting fanfare to simply attract investors - to the detriment of proper operational oversight and market development – many believe that major acquisitions were poorly researched. Still others believe that producers ignored cues that industry inventories were sufficient to meet market demand in the recreational market by mid-2017 but continued to produce, all the same. This all has led to a massive retrenchment of consumer and investor confidence in stock valuations.
Boardroom shakeups began to dominate the media in early 2019, when Aphria co-founder Vic Neufeld was replaced by Irwin Simon and Supreme Cannabis Company CEO Navdeep Dhaliwal by (Interim) CEO Colin Moore. By July 2019, founder and CEO Bruce Linton had departed from Canopy Growth after quarrels with shareholder Constellation Brands. (At that point Canopy Growth had shrank in market capitalization from $91 billion in October 2018 to $33 billion in October 2019.) More exits followed in earlier this year with CFO Chris Karkenny’s departure from Aphria, CEO Torsten Kuenzlen’s departure from Sundial Cannabis, and CEO Terry Booth’s departure from Aurora Cannabis. The list goes on.
A transition in leadership signals a corner turned. As Terry Booth himself commented in an interview with BNN Bloomberg “It’s time for more of a button-up CEO, not a growth CEO,” he said. “You want a capital market guy or gal. You really need to have someone with their eye on the ball for positive EBITDA.” After the cash burn experienced over the last two years, lessons have been learned.
No longer in its early days, the industry is in the process of reevaluating its priorities with a focus on the bottom line. Now that the executive mindset has been forced to change, so have the conditions that have driven outrageous valuations and sky-high stock prices. With a new generation of leadership, a realistic and measured approach to industry investment will captain the seas ahead.