At this time last year, the marijuana industry could do no wrong. On Oct. 17, 2018, Canada became the first industrialized country to greenlight cannabis, which built on momentum in the United States, which has witnessed 33 states pass medical cannabis laws to some varied degree. The sky appeared to be the limit last October, with Wall Street rolling out some very lofty worldwide sales targets by 2030.
However, as you're probably aware, the cannabis investment thesis, at least in the short term, has gone up in smoke over the past seven months.
Here's why marijuana stocks have performed so poorly of late
A number of factors have played a role in punishing pot stocks of late. In Canada, for instance, regulatory and procedural problems have led to a persistent shortage of cannabis products -- a shortage that's likely to continue when derivatives first hit dispensary shelves in mid-December.
Regulatory agency Health Canada has been completely buried by cultivation, processing, and sales license applications, which means that growers have been waiting many months, if not longer than a year, for the green light to grow and sell their cannabis. At the same time, select provinces have been slow to approve licenses for physical dispensaries, leaving consumers in these provinces few legal channels with which to buy pot products. Both of these factors have allowed the illicit market to thrive.
But it's not just Canada where the black market is budding. In U.S. states with high tax rates on recreational weed, illicit production is still going strong. In California, year-over-year revenue declined $500 million to $2.5 billion in the year it opened its doors to adult-use marijuana sales. Between state and local taxes, a 15% excise tax on cannabis, and a wholesale tax on either dried flower or leaves, Californians buying legal weed could be paying up to a 45% tax rate. This makes it nearly impossible for legal product to compete with black market producers.
There's also been a serious loss of trust in the cannabis space. CannTrust Holdings (NYSE:CTST), for instance, announced in early July that it had been growing cannabis in five unlicensed rooms for a period of six months between October 2018 and March 2019. Since this admission, CannTrust has seen Health Canada suspend its cultivation and sales licenses, and it has fired its CEO, Peter Aceto. This admission torpedoed the entire industry, and it now has investors combing through CannTrust's peers with a fine-toothed comb.
Now, another shoe appears to have dropped that signals exactly the sort of struggles the pot industry could be facing.
Cannabis industry job... cuts?
Earlier this year, DataTrek Research co-founder Nick Colas referred to the marijuana industry as the "fastest-growing labor market in the U.S." In 2018, 64.389 jobs were added, bringing the total number of jobs directly tied to the U.S. weed industry up to 211,000. Meanwhile, in Canada, the number of workers at licensed producers jumped from approximately 2,400 at the end of 2017 to roughly 3,500 by Oct. 17, 2018, when recreational pot sales began. With sales projections so lofty, and cannabis stocks expanding quickly, it's only natural to expect rapid job growth.
However, this jobs growth may not be as solid as expected. With persistent supply issues to our north, and high tax rates constraining legal sales in select U.S. states, we've begun to see job cuts.
On Thursday, Oct. 24, just a few weeks after lowering its fourth-quarter sales forecast and removing its 2020 full-year sales guidance, Canadian grower HEXO (NYSE:HEXO) announced that it was cutting about 200 jobs across a variety of departments and locations. In its update, HEXO reiterated that the delayed rollout of derivatives, early signs of pricing pressure, and a slower-than-expected rollout in physical dispensaries are adversely affecting its operations. To reduce costs to align with these challenges, HEXO has chosen to lower its headcount. "The actions taken this week are about rightsizing the organization to the revenue we expect to achieve in 2020," said HEXO CEO Sebastien St-Louis.
Also on Thursday, embattled CannTrust announced that it would temporarily shed as many as 140 workers as it works to regain compliance with Health Canada and reduce expensing while new propagation and sales are suspended. The headcount reduction is expected to save the company about $400,000 Canadian per month, with the possibility of a CA$0.8 million severance charge if these workers aren't rehired within 35 weeks. CannTrust anticipates satisfying a laundry list of noted deficiencies by sometime in the first quarter of 2020 and hopes to regain compliance and rehire these workers shortly thereafter.
Even fast-growing private companies aren't immune to sudden cutbacks. California-based delivery service Eaze, which has been rumored to eventually go public, laid off 36 people from a variety of departments earlier this month. This represents about 20% of the company's workforce, and it may be due, in part, to weaker demand caused by the Golden State's high tax rate on legal weed.
Obviously, we're only talking about a cumulative job loss between all three companies of around 375. That's not much, considering just how many jobs are tied to cannabis in North America. However, it may very well signal a new step in the industry's maturation process -- one in which the industry goes backwards before eventually motoring ahead.