Under-pressure Canadian producer Hexo has launched a new budget range of cannabis flower products as prices look set to crash.
Hexo, which recently downgraded its revenue projections and laid off 200 staff, says its value brand – Original Stash – will retail at around $3.40 per gram – around half the average Canadian selling price.
This will allow the company to compete with the illegal market which is still thriving, over one year since the country legalized recreational cannabis on October 17, 2018. Analysts at Scotiabank estimated in early February that the black market would account for 71% of total cannabis sales in Canada in 2019.
Is There Too Much Cannabis?
The Original Stash launch may also help explain what some analysts have identified as a ‘worrying oversupply issue’ in the Canadian market. It was not so long ago concerns were mainly about shortages with the second wave of cannabis consumer products set to hit the market.
However, market analyst Stephen McBride, writing in Forbes magazine, says “pot producers built up a massive surplus of pot. In fact, only 4% of pot produced in Canada in July has been sold!” He goes on to say that Aurora Cannabis has been dumping part of its harvest into ‘wholesale’, which means it is selling it for cheap’…due to sluggish demand.
And, he says this trend will continue ‘as pot companies continue to ramp up production and flood the market with more pot’.
Prices Crash By 50%
In the last six months the North American cannabis companies have lost their luster for investors with average stock prices down by 50%. Sean Williams ,writing on The Motley Fool website, believes the oversupply problem may be niggling away in the minds of savvy investors and company executives.
He highlighted recent results from The Green Organic Dutchman (TGOD) which earlier this month said it was its ‘idling production’ at its flagship 820,000 sq-ft Canadian grow facility. David Jagielski, also writing for the Motley Fool website, believes others will follow suite.
He said: “Although Aurora Cannabis and Canopy Growth have given no indication that they intend to slow-step their capacity expansion projects, it wouldn’t be in any way surprising if they eventually followed TGOD’s lead and tightened their belts to reduce their cash burn.”
A number of issues are troubling cannabis investors with sluggish revenue performances amongst the leading companies featuring prominently. Many cannabis firms are burning through cash at a rapid rate and market observers now question whether the oversupply issue will prompt further price – and cost – cutting moves, such as that by Hexo.
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