Cannabis prices are falling across Canada. According to the cannabis consumer price index (CPI) released by Statistics Canada in May 2023, it has fallen several percentage points over the last year — bucking the inflationary trends across other consumer sectors.
While this is good news for the legal market, it’s a double-edged sword for cannabis retailers.
Lower prices will once again squeeze already tight profit margins. With nearly every other consumer sector seeing the impact of inflation, and the demand for legal weed higher than ever, what is happening in Canada’s cannabis market? Why is the price of weed continuing to fall?
A Look at the Numbers: The Average Price Per Gram Trending Downward
According to Cannabis Benchmarks, the average price per gram for the week of June 16, 2023, was $4.92, roughly a 5.6 percent decrease compared with the very end of 2022. But this is at the consumer end. The prices of wholesale flower in Canada have fallen even more drastically.
In an update published by MJBizDaily in February 2023, wholesale prices had tumbled more than 40 percent from the year before.
Statistics Canada, which tracks prices via the CPI, has found similar trends. In April 2022, cannabis’ CPI was 74.7 (out of 100), while in April 2023, the CPI was 72.0.
While two percent may not seem like a lot, this disagrees with the rising prices of liquor and cigarettes. According to the same Statistics Canada report, the CPI for alcohol has risen by 5.9 points and cigarettes by 7.8.
Canadians are painfully aware that consumer prices are going up across the board thanks to a four percent inflation rate. So, why are cannabis prices trending in the opposite direction? More importantly for cannabis retailers, how will this impact business?
What’s Causing Recreational Cannabis Prices to Fall?
Several factors in Canada’s recreational cannabis market have come together to cause the recent decline in weed prices.
Excess Infrastructure
Canadians are buying more cannabis than ever before, but not as much as the market may have predicted. Right now, our country has an excess cultivation infrastructure. Too much cultivation space ultimately leads to excess inventory.
The silver lining? With several notable cultivators downsizing their production, the country’s cultivation capacity will soon more closely parallel our consumption capacity.
Oversupply
Canada is still working through a glut of cannabis inventory, a headache from the wild year of 2022. Health Canada estimates 1500 tons of cannabis is currently languishing in storage, which equates to roughly 1.4 billion grams.
With cultivators struggling, many have decided to sell off their inventory at bargain basement prices to hopefully claw back their margins. Even high-end grade AAA flower is being sold well below market value.
Stiff Competition
At this point, it’s common knowledge that there is a lot of competition on the retail front. With so many cannabis retailers serving the same market, there is significant pressure to keep prices low.
Nobody needs to explain what will happen if you have the most expensive product in your area — even your most loyal customers can easily find it cheaper and often right next door. In most markets, retail prices remain low because stores have to attract customers, which sometimes means a race to the bottom.
Lower Cannabis Prices: A Good News, Bad News Scenario
There has never been a better time to be a consumer in Canada’s legal cannabis market. Prices are lower than ever, even for high-end flower. These low prices have finally convinced many Canadians to make the switch from their legacy dealer to a legal one.
More people are buying from the legal market than the black, for the first time since legalization. In part, this is because of more comparable costs.
But there is a flip side. Lower prices are cutting into profit margins for everyone along the supply chain. Licensed producers have been hardest hit. Canopy Growth is one of the most recent big names to lay off hundreds of workers and reduce production. But it’s a trend hitting all cultivators.
Lower prices are also eating into retailer profit margins. Just because it’s cheaper than ever before to buy cannabis wholesale doesn’t mean retailers get to keep the extra margin. Again, retailers need to stay competitive with prices while also coping with the inflated costs of doing business in 2023.
Is there a light at the end of the tunnel? Most analysts expect the market to slowly get back on its feet as the country’s excess production shifts to more appropriately meet consumer demand. According to MJBizDaily, the oversupply issue should also begin to even out by the end of 2023.
Plus, retailers are also getting a break from provincial distributors — at least in Ontario. The Ontario Cannabis Store announced it would reduce its price margins to help retailers get ahead.
As reported by the CBC, “The margin reduction will come from a fixed mark-up for each product category that will be standard for all producers and applied as a percentage above each product’s landed costs, which already take into account producers’ margins and excise taxes.”
Let’s hope other provinces follow suit.
Canada’s Recreational Cannabis Industry Getting the Kinks Ironed Out
While the last few years have proven challenging for everyone in Canada’s recreational market, at least some of this turmoil is to be expected.
Let’s not forget that cannabis was illegal only five years ago. Canada was one of the very first countries to legalize it for adult use. It’s expected that the market will go through several ups and downs before it starts to even out.
As a retailer, most signs indicate the most difficult times are in the rearview mirror. With the country’s overcapacity, oversupply, and competition issues starting to even out, retailers should start to feel the pressures easing. While the short term is not without challenges, the long term looks bright.
