One-in-five Canadians are expected to consume cannabis in 2025, according to a new analysis by Ernst & Young outlining the firm’s upbeat take on the nascent industry.
EY is calling for the Canadian cannabis market to grow by about 50 per cent to $11 billion in six years time. Average consumer spending is expected to surge by 30 per cent. And wholesale prices are projected to land between $4 and $5, if enough capital is fed into the sector.
Zachary Pendley, the global accounting giant’s Canada cannabis real estate and valuation leader, is also confident that black market dominance will abate as legal retail sales ramp up from a sluggish start.
“As the industry matures, access to product eases and higher margin derivatives come online, we'll see a rise in consumer spending on legal cannabis,” he said in a news release on Tuesday. “The reality is that retail and distribution frameworks across Canada have been implemented much slower than anticipated, pushing many consumers to look for alternatives.”
So far, Canadian cannabis spending has overwhelmingly flowed to the illegal market. Canadian households spent $5.9 billion on cannabis in the fourth quarter, according to Statistics Canada. The federal agency found $4.7 billion of that figure was spent outside the legal system.
The situation has prompted calls for Ottawa to do more to live up to its commitment to divert cash away from illicit sources, and into the newly-legal adult-use market. OrganiGram Holdings Inc. (OGI.V) chief executive Greg Engel recently expressed frustration about robust black market competition in an interview with Yahoo Finance Canada.
Lack of supply has been the biggest headwind for Canada’s legal market since adult recreational sales were introduced on Oct. 17 of last year. The situation has delayed the roll out of brick-and-mortar retail locations in Ontario, and caused government-run stores in Quebec to close on certain days of the week.
EY is calling for supply to outstrip demand in less than five years if “current and planned facility expansions of over 14+ million square feet are completed and licensed in a timely manner.”
“This will increase competition and drive down commodity prices, resulting in the average wholesale price for dried flower to likely be between $4 to $5 by 2025,” Pendley said.
Cannabis giant Canopy Growth Corp. (WEED.TO) said its average selling price per gram was $7.33 in its most recent quarterly results.
EY said achieving this level of supply will require capital investment of more than $250 per square foot.
Pendley’s $11 billion valuation for the Canadian cannabis market in 2025 is on the bullish side compared to other observers.
The Washington D.C.-based analytics company New Frontier Data estimated the market will be worth $9.2 billion that year. A report from the cannabis research firm Brightfield Group released in February pegged the market at $5 billion by 2021, down from a previous estimate of $8 billion for that same year.
EY said Canada’s “direct cannabis market,” not including the “ancillary market,” is worth $6.5 billion in 2019.
The firm expects a suite of new cannabis products will be the catalyst that propels the market to $11 billion, as consumers spend more on higher-cost edibles and extracts.
EY estimates dried flower accounts for 84 per cent of sales in 2019, and expects that to shrink to 46 per cent by 2025. Extract sales are expected to more than triple over that time period.
Average annual spending per consumer is projected to jump by about 30 per cent from $1,263 this year to $1,652 in 2025.
Pendley coupled his rosy outlook for Canada’s cannabis sector with a warning that the market remains “immature and undefined,” with regulatory uncertainty over new products like edibles challenging long-term investment.
“Managing these unknowns, coupled with rising competition, is putting more pressure on producers to maximize output in the most cost-effective and efficient ways," he said.
“Canadian licensed producers should look to strategic joint ventures and partnerships as a way to navigate the regulatory landscape, access greater capital and enter new markets – both in Canada and internationally.”