Federal claims of high cannabis supplies are “blowing smoke” over the actual product shortages that will continue to plague online and retail markets in Canada for some time, a new analysis says.
While recent Health Canada estimates pegging inventories of smokable cannabis at 19 times demand may be technically true, they don’t reflect the production industry’s ability to get finished goods onto store shelves or Canada Post trucks, Brock University pot expert Michael Armstrong says.
“That (19 times number) is mathematically correct but it doesn’t really mean very much,” says Armstrong, who teaches operations management at the St. Catharines, Ont., school.
“It certainly doesn’t mean what they claim it means, that there’s lots of supply. There is very little finished dry cannabis actually available for customers,” he says.
Armstrong says there is a good amount of cannabis oil to be had and a lot of grown plants in the hopper.
“But most of that is raw material, or what we call ‘work-in-process inventory’,” he says, adding it takes between two weeks and two months to properly dry and cure the harvested weed.
“So a large amount of that you’re just waiting (on), you can’t do anything with that.”
More importantly, however, even products ready for consumption can’t be packaged and transported due to logistical shortcomings endemic in the industry, Armstrong says.
“Processing, packaging, shipping, scheduling, all that boring stuff that the CEOs didn’t worry about before (Oct. 17) legalization day,” he says.
Armstrong says Canada’s licensed producers have been expert at breeding, growing, marketing and conjuring up stock market and merger windfalls.
“All the glamorous stuff,” he says.
But as of last month, Armstrong says, only 15 per cent of the cannabis inventories were made up of finished products and less than half of that was distributed to provincial warehouses or actual store shelves.
“What Health Canada is doing is kind of like saying ‘there can’t be a bread shortage in Toronto because there’s lots of wheat in Winnipeg’,” Armstrong says.
“Well, wheat, yes, eventually turns into bread, but first you have to grind it into flour and then you have to bake it and, oh, by the way, you have to get it to Toronto,” he says.
Similar downstream processes are simply not up to speed in the pot business, Armstrong says.
And beyond these logistical shortcomings, he says Ottawa’s analysis of the industry’s health is fundamentally flawed to begin with.
Federal cannabis estimates are utilizing a common business metric that does not fit the new industry, he says.
Armstrong says many businesses rightly compare inventories to sales as an indication of their current financial status.
But that supply-to-sales ratio is only telling in a stable industry like the grocery business, he says.
Should inventories go up at Loblaws or Walmart, for example, industry watchers can make educated guesses about the state of those ventures.
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“That tells us they are building up inventories or maybe it tells us that sales are declining,” Armstrong says.
“It doesn’t necessarily mean anything by itself, but it’s a clue that something may be happening.”
But comparing inventories to sales in the cannabis industry is practically meaningless, Armstrong argues — largely due to the instability of the new market.
Where grocery chain sales would reflect demand precisely in most cases, legal cannabis sales are likely between a third and a fifth of current demand, Armstrong says.
“So saying you have enough inventory to keep up with current sales is a very low target,” he says.
“You want enough inventory to actually meet demand, not to maintain sales that are too weak to begin with.”
And in a vicious cycle, those weak sales are in turn a product of too little inventory, Armstrong says.
He says what’s needed to accurately gauge cannabis industry health is data on actual production — such as tons of plants harvested or kilograms of packaged goods per month.
“Those are the numbers that an operations professor like me would be much more interested in because those tell me whether you can keep up with demand,” he says.
Armstrong says his calculations translating inventory stashes into actual product availability show finished goods production dropped some 25 per cent from November to December and partly recovered through January — the last date for which he had figures.
“Shipments in January were much less than in December, which were much less than in October,” he says of the national situation.
“So ... when are they going to catch up?” Armstrong asks. “Well, right now they’re making no progress at catching up.”
Industry watcher Rod Elliot says it was inevitable that some production problems would crop up within the brand new industry.
“I think a lot of people thought that you could snap your fingers on Oct. 17, 2018 and we would have a perfectly functioning legal market,” says Elliot, a senior vice president with the Toronto consulting firm Global Public Affairs,
“That was not realistic,” he said.
Elliot says part of the problem may be that producers have not been able to scale up their cultivation quickly enough to meet demand.
“And yes, I agree that the downstream logistics have been a challenge for some companies. In fact, the CEO of one company said that on a call with financial analysts,” he says.
“It’s not just trimming, packaging, labelling and getting the product on a truck, (producers) actually have to negotiate supply agreements with each provincial wholesaler and, in the case of Saskatchewan, each retailer.”
Elliot says part of the supply problem might be alleviated by bringing more producers into the picture.
He says there are currently 168 licensed producers in the country but that only about 80 have sales licences.
Elliot asks if the Ontario Cannabis Store — the sole wholesaler of cannabis in this province — has reached out to enough producers. In Quebec, where shortages have also been rife, the province has agreements with only eight producers, he says.
The Ontario Cannabis Store, which runs online sales and supplies pot stores in the province, has agreements with 36 producers.
“At the end of the day (however) everything Canada is experiencing is virtually identical to challenges that states like Colorado and Oregon faced when they legalized at the state level,” Elliot says.
“Believe me, the CEOs of the (production) companies have a laser-like focus on solving these issues because at the end of the day to be successful, they need to get their product to market and book sales.”
Armstrong says he sees the opening of Canada’s industry as somewhat akin to the dot-com bubble of the 1990s when flashy, start-up computer players could not deliver on the promise of their lavishly funded enterprises.
“The glamorous front end did well, but the boring, mundane implementation part didn’t,” he says.
“So, yeah, we’re seeing some of that in broad terms here.”
Unlike the dot-coms, Canada’s cannabis industry can right itself with a slow and steady buildup of the necessary logistics — sometime in the next year or two.
But Armstrong does not agree with some industry analysts who have said that initial product shortages will hobble the legal industry in it’s long-term battle with the black market.
“In terms of Canada and the big picture, this is more of a marathon than a sprint,” he says.
While recent Health Canada estimates pegging inventories of smokable cannabis at 19 times demand may be technically true, they don’t reflect the production industry’s ability to get finished goods onto store shelves or Canada Post trucks, Brock University pot expert Michael Armstrong says.
“That (19 times number) is mathematically correct but it doesn’t really mean very much,” says Armstrong, who teaches operations management at the St. Catharines, Ont., school.
“It certainly doesn’t mean what they claim it means, that there’s lots of supply. There is very little finished dry cannabis actually available for customers,” he says.
Armstrong says there is a good amount of cannabis oil to be had and a lot of grown plants in the hopper.
“But most of that is raw material, or what we call ‘work-in-process inventory’,” he says, adding it takes between two weeks and two months to properly dry and cure the harvested weed.
“So a large amount of that you’re just waiting (on), you can’t do anything with that.”
More importantly, however, even products ready for consumption can’t be packaged and transported due to logistical shortcomings endemic in the industry, Armstrong says.
“Processing, packaging, shipping, scheduling, all that boring stuff that the CEOs didn’t worry about before (Oct. 17) legalization day,” he says.
Armstrong says Canada’s licensed producers have been expert at breeding, growing, marketing and conjuring up stock market and merger windfalls.
“All the glamorous stuff,” he says.
But as of last month, Armstrong says, only 15 per cent of the cannabis inventories were made up of finished products and less than half of that was distributed to provincial warehouses or actual store shelves.
“What Health Canada is doing is kind of like saying ‘there can’t be a bread shortage in Toronto because there’s lots of wheat in Winnipeg’,” Armstrong says.
“Well, wheat, yes, eventually turns into bread, but first you have to grind it into flour and then you have to bake it and, oh, by the way, you have to get it to Toronto,” he says.
Similar downstream processes are simply not up to speed in the pot business, Armstrong says.
And beyond these logistical shortcomings, he says Ottawa’s analysis of the industry’s health is fundamentally flawed to begin with.
Federal cannabis estimates are utilizing a common business metric that does not fit the new industry, he says.
Armstrong says many businesses rightly compare inventories to sales as an indication of their current financial status.
But that supply-to-sales ratio is only telling in a stable industry like the grocery business, he says.
Should inventories go up at Loblaws or Walmart, for example, industry watchers can make educated guesses about the state of those ventures.
Advertisement
“That tells us they are building up inventories or maybe it tells us that sales are declining,” Armstrong says.
“It doesn’t necessarily mean anything by itself, but it’s a clue that something may be happening.”
But comparing inventories to sales in the cannabis industry is practically meaningless, Armstrong argues — largely due to the instability of the new market.
Where grocery chain sales would reflect demand precisely in most cases, legal cannabis sales are likely between a third and a fifth of current demand, Armstrong says.
“So saying you have enough inventory to keep up with current sales is a very low target,” he says.
“You want enough inventory to actually meet demand, not to maintain sales that are too weak to begin with.”
And in a vicious cycle, those weak sales are in turn a product of too little inventory, Armstrong says.
He says what’s needed to accurately gauge cannabis industry health is data on actual production — such as tons of plants harvested or kilograms of packaged goods per month.
“Those are the numbers that an operations professor like me would be much more interested in because those tell me whether you can keep up with demand,” he says.
Armstrong says his calculations translating inventory stashes into actual product availability show finished goods production dropped some 25 per cent from November to December and partly recovered through January — the last date for which he had figures.
“Shipments in January were much less than in December, which were much less than in October,” he says of the national situation.
“So ... when are they going to catch up?” Armstrong asks. “Well, right now they’re making no progress at catching up.”
Industry watcher Rod Elliot says it was inevitable that some production problems would crop up within the brand new industry.
“I think a lot of people thought that you could snap your fingers on Oct. 17, 2018 and we would have a perfectly functioning legal market,” says Elliot, a senior vice president with the Toronto consulting firm Global Public Affairs,
“That was not realistic,” he said.
Elliot says part of the problem may be that producers have not been able to scale up their cultivation quickly enough to meet demand.
“And yes, I agree that the downstream logistics have been a challenge for some companies. In fact, the CEO of one company said that on a call with financial analysts,” he says.
“It’s not just trimming, packaging, labelling and getting the product on a truck, (producers) actually have to negotiate supply agreements with each provincial wholesaler and, in the case of Saskatchewan, each retailer.”
Elliot says part of the supply problem might be alleviated by bringing more producers into the picture.
He says there are currently 168 licensed producers in the country but that only about 80 have sales licences.
Elliot asks if the Ontario Cannabis Store — the sole wholesaler of cannabis in this province — has reached out to enough producers. In Quebec, where shortages have also been rife, the province has agreements with only eight producers, he says.
The Ontario Cannabis Store, which runs online sales and supplies pot stores in the province, has agreements with 36 producers.
“At the end of the day (however) everything Canada is experiencing is virtually identical to challenges that states like Colorado and Oregon faced when they legalized at the state level,” Elliot says.
“Believe me, the CEOs of the (production) companies have a laser-like focus on solving these issues because at the end of the day to be successful, they need to get their product to market and book sales.”
Armstrong says he sees the opening of Canada’s industry as somewhat akin to the dot-com bubble of the 1990s when flashy, start-up computer players could not deliver on the promise of their lavishly funded enterprises.
“The glamorous front end did well, but the boring, mundane implementation part didn’t,” he says.
“So, yeah, we’re seeing some of that in broad terms here.”
Unlike the dot-coms, Canada’s cannabis industry can right itself with a slow and steady buildup of the necessary logistics — sometime in the next year or two.
But Armstrong does not agree with some industry analysts who have said that initial product shortages will hobble the legal industry in it’s long-term battle with the black market.
“In terms of Canada and the big picture, this is more of a marathon than a sprint,” he says.
