High prices were a regular consumer complaint when Canada legalized recreational cannabis in October 2018.
Only a year and a half later, Canada’s market for affordable cannabis flower is growing rapidly, with large cannabis producers introducing competitive value brands at lower prices.
“I would say that the value segment is the most hotly contested product segment in cannabis today, with most major (licensed producers) racing towards 3½-gram options in the range of CA$19 to, let’s say, CA$25 dollars,” ($14-$18.44) said Raj Grover, CEO of Alberta-based retailer High Tide.
Canada’s race toward discount cannabis has business implications for producers and retailers alike.
For retailers, increasing consumer interest in more affordable value brands provides an opportunity not just to sell more cannabis but also to counter claims that legal marijuana always costs more than illicit-market cannabis.
For some major licensed producers, discount cannabis appears to be driving sales – but at the cost of shrinking profit margins.
Arrival of value brands
Ontario-based Canopy Growth appears to have experimented with value cannabis before its rivals, with an unheralded “Plain Packaging” brand launched at the outset of legalization in 2018.
“I would call Plain Packaging a proto-value brand considering it was launched into the brand-new rec market before we had sales data or real market segmentation insight,” Canopy senior communications adviser Adam Greenblatt wrote in an email to Marijuana Business Daily.
Few resources were put into promoting or developing the Plain Packaging brand, Greenblatt said.
It was relaunched in May 2019 – dubbed “Twd.” – and is Canopy’s current value brand.
Canadian media started paying more attention to discount legal marijuana when Hexo Corp. launched its Original Stash brand in late 2019.
In Hexo’s key Quebec market, the 28-gram product sells for 125.70 Canadian dollars – CA$4.49 per gram – which the Ontario producer has described as “black-market prices.”
Meanwhile, more and more producers have joined in the value game, including Alberta-based Aurora Cannabis, which introduced its Daily Special brand in February. (Daily Special was the top-selling brand in Ontario in March and April, Aurora executives said on a May earnings call.)
Organigram in New Brunswick recently launched its Trailer Park Buds brands in 28-gram packages to meet “evolving consumer preferences.”
Aphria, headquartered in Ontario, has launched low-cost Dealer’s Pick products under its Good Supply brand.
British Columbia-based Zenabis now offers a discount brand called Re-Up.
Retailers see boost
Grover said value brands at High Tide’s Canna Cabana and KushBar stores comprised up to 10% of sales when Original Stash launched last November, then grew to 25% of sales in April as more and more value brands hit the market.
He expects that growth to continue in the coming year, speculating that value brands might eventually comprise as much as half the business, including value brands of Cannabis 2.0 products such as vapes.
So far, Grover said, value brands don’t mean lower margins for High Tide.
“The question becomes whether or not customers are actually consuming more cannabis or high-volume-price SKUs truly represent less dollar value for customers moving forward,” he said.
Drawing customers into stores with affordable products also creates an opportunity to upsell them to premium cannabis tiers, Grover added.
For Ryan Roch, owner of independent retailer Lake City Cannabis in Chestermere, Alberta, bulk discount brands are an opportunity to show customers that legal pricing can match or beat black-market pricing.
Roch said he sometimes talks with customers about the price of an ounce of cannabis from their unregulated-market suppliers.
“The prices are all over the map, but generally CA$120, CA$140,” he said.
“And then I go, ‘Oh, well that’s interesting, I have an ounce here for CA$109.99.’”
Available value brands vary widely in quality and tend to be on the drier side, according to Roch.
“But you can expect a decent smoke, good flavor, for a good price,” he said. “… Most consumers are able to look past the imperfections when the price is right.”
Cowen senior research analyst Vivien Azer said the introduction of value offerings happened faster than she expected at the outset of recreational legalization in Canada, but it’s “the logical response to all the excess inventory that the (licensed producers) have to contend with right now.”
Unsurprisingly, licensed producers are finding that discount flower is dragging down their average selling prices – and their margins.
Aurora launched Daily Special halfway through the company’s third quarter and quickly saw “a significant shift in our product mix” toward the value brand, according to a regulatory filing.
An increase in sales volume for the quarter was offset by Daily Special’s “more competitive price point,” and Aurora’s average net selling price fell to CA$4.33 per gram from CA$4.76 in the previous quarter.
On Hexo’s latest earnings call, executives credited Original Stash with making up roughly half its third-quarter sales volume.
However, Hexo’s average price per gram before excise taxes was CA$4.35 in the first quarter, then fell to $3.49 in the second quarter and $3.19 in the third.
“If you’re selling the same product at a lower price, you will generate fewer profit dollars from it,” Azer said.
“Now, the exercise that the manufacturers are going to have to go through is trying to optimize their inputs to try to offset some of that natural margin compression.”
More competition in the value space suggests even lower prices to come.
On the Hexo earnings call, executives were asked whether there’s room for the company’s value pricing to decline even more.
“I mean, at the end of the day, the consumer will drive pricing, and I don’t think the consumer has a floor in mind,” Hexo CEO Sebastien St. Louis said.