Canopy Growth, backed by Corona beermaker Constellation Brands Inc., will close major operations and cut 60% of its jobs as it says Canada’s marijuana industry has failed to meet expectations due to competition from a thriving black market.
The scaling back of Canada’s second-largest pot producer is the second restructuring in less than 12 months. Together with job cuts announced in April, Canopy estimates it can save as much as C$310 million ($230 million) and be profitable, helping it become the right size for Canada, and enter the US through Canopy USA. On a conference call, Chief Executive Officer David Klein cited Canada’s thriving illicit market for revenue declines.
“Today, there are two very different cannabis markets in Canada. One that’s legal, highly taxed and regulated, and one that’s thriving and illicit,” he said, estimating that the black market represents about 40% of Canada’s overall cannabis sales. That has meant that the $7 billion marijuana market that was supposed to materialize in Canada hasn’t come to fruition, Klein said, and forces companies like his to try to compete on price with illegal operators who don’t have to pay taxes.
The company will move to an “asset-light” model in Canada, sourcing many of its products from outside parties. The changes mean the end of Canopy’s cannabis cultivation facility in Smiths Falls, Ontario. Headcount across the business will fall by 800 positions, the company said in a statement Thursday.
Shares fell as much as 18% in Thursday trading.
It’s a massive shakeup for a business that was once the standard-bearer for Canada’s pot sector after Prime Minister Justin Trudeau’s government legalized the use of recreational marijuana in 2018. That same year, Constellation, the marketer of Corona beer and Robert Mondavi wines, struck a multibillion-dollar deal that gave it a 38% stake in the cannabis firm.
Canopy’s complaints about competition from the black market echo those made in California and other US states, as the marijuana industry lobbies for tax cuts, the ability to open more locations and other regulations that could favor it.
Canopy was Canada’s most valuable marijuana company — now it’s second to Tilray Inc. — and at one point its stock-market value rose to nearly $20 billion. But business results have fallen far short of expectations and it has never been able to fully realize Constellation’s high hopes for pot-infused beverages.
The company recorded just C$101 million in revenue for the fiscal third quarter ended Dec. 31 and lost C$88 million on an adjusted basis, before interest, taxes, depreciation and amortization.
“Canopy must reach profitability to achieve our ambition of long-term North American cannabis market leadership,” Klein said in the statement.
Many of the job cuts will happen right away. The measure will save an estimated C$140 million to C$160 million in cost of goods and administrative expenses over the next year, putting Canopy’s Canadian business on a path to breaking even on an adjusted Ebitda basis in fiscal 2024, Chief Financial Officer Judy Hong said.
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