The Canadian cannabis market is in big trouble. Canopy Growth (CGC -23.12%) was once seen as the industry leader, and now it's in what appears to be an endless spiral downward. Tilray Brands (TLRY -18.22%) withdrew a lofty $4 billion forecast this year after realizing the strength of the headwinds it's facing both internationally and in the Canadian market.
Just how bad is the pot market in Canada? Here are four numbers from cannabis data analytics company Headset that summarize the problems.
Average monthly sales per store are down 20% in Ontario
Headset tracks cannabis data for multiple Canadian provinces, with Ontario being one of them. Ontario is Canada's largest province and is a good gauge of how the industry is doing. And one of the most troubling numbers in Headset's recent data from last month is that average monthly store sales in the province have fallen by 20% over the past year.
Even as cannabis prices have been coming down, the illegal market continues to pose a problem, especially as people have less money to spend amid inflation. But there's another reason store sales aren't doing well, and it has to do with the next data point.
The store count in Ontario has risen by close to 40%
There has been an influx of people looking to open up pot shops and take advantage of the new industry's growth opportunities. But by doing so, markets become saturated and there isn't enough demand to go around, leading to worsening store sales. Headset's data says that the number of stores in Ontario has risen by roughly 40% in the past year.
The situation may only get worse. Mississauga, which neighbors Toronto and is itself one of the largest cities in Ontario, recently lifted its ban on pot shops, which could result in even more stores opening up in the near future.
The number of brands in Canada has risen 369% in the past three years
It's not just the number of pot shops that's problematic. According to Headset, in just three years, there's been a mammoth 369% increase in brands as well, giving users perhaps too many options to choose from.
It's that level of competition that makes it difficult for large companies such as Canopy Growth and Tilray Brands to dominate market share. Even though they are large businesses, without a way to legally advertise and reach consumers, it becomes difficult to stand apart from all the other brands. Previously, Tilray's CEO Irwin Simon infamously referred to some of his company's smaller rivals as "ankle-biters," as they have made it difficult to grow market share.
The growth rates for both Tilray Brands and Canopy Growth have been on a downward trend for multiple years.
TLRY Revenue (Quarterly YoY Growth) data by YCharts
Sales per brand have declined by 70%
As with average store sales coming down due to an influx of pot shops, Headset reports that individual brands are also seeing their revenue decline, with the median sales per brand down 70% over the past three years. That is likely due to the heavy competition and the illegal market, which remains popular.
The CEO of the Ontario Cannabis Store, which distributes pot in the province, says it is effectively a "race to the bottom" with companies slashing prices in order to be more competitive. And even with lower prices, the OCS estimated that last March, the illegal market represented 43% of cannabis revenue. While that's down from 75% a few years earlier, it underscores just how much of an uphill battle cannabis companies such as Tilray and Canopy Growth still face right now.
Canadian pot stocks make for ultra-risky investments
Cannabis stocks have been struggling over the past few years, to say the least. Tilray Brands stock is down 76% since 2022, and Canopy Growth's losses are even deeper at 93%.
The problem is that unlike the U.S. cannabis market, where new states are legalizing marijuana and there are more opportunities for companies to pursue, Canadian federal legalization has already taken place. There are no big new opportunities out there -- but there is much more competition.
As long as companies are dependent on the Canadian cannabis market for growth, they're going to remain risky investments due to all that congestion and market saturation. It's a key reason why both Tilray Brands and Canopy Growth are eager to enter the U.S. cannabis market, even though there's no reason to believe that legalization is imminent at the federal level.
Although these and other Canadian pot stocks may seem cheap right now, investors should tread carefully, as the data suggests there's still plenty of risk out there.
