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The World’s Biggest Weed Company Is Slashing Jobs and That Means Trouble

Canopy Growth, the world's biggest cannabis company's 500 layoffs are a sign of trouble to come

One of the most high profile legal weed companies in the world is shutting down 3 million square feet of greenhouses and laying off 500 people—a move that has the cannabis industry bracing for more bad news.

Canopy Growth, the most valuable cannabis producer on the stock market, announced Wednesday that it will close down two British Columbia facilities where more than half of its weed is cultivated, and cancel a planned greenhouse in Ontario, blaming a lack of demand for its weed and a change in federal government rules. Canopy will take a financial hit of $700 to $800 million because of the closures.

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The announcement follows similar downsizing efforts by other major players in the cannabis industry. Experts say companies need to do more to compete with the black market and that many won’t make it beyond this year.

In a written statement, Canopy Growth CEO David Klein called the decision difficult but necessary to “align Canopy Growth’s supply with consumer demand.” He also pointed to a Canadian recreational market that “has developed slower than anticipated.”

While it’s true that legal weed sales haven’t been as strong as many anticipated, especially in Ontario which was slow to license retail stores, weed consumption hasn’t changed much since legalization. A Statistics Canada report found that Canadians spent less than $1 billion on legal weed in the year after legalization, a lower-than-anticipated number that is dwarfed by the multibillion-dollar black market.

Klein said the federal government greenlighted outdoor cultivation after the company had already put significant resources into greenhouse production in its two B.C. grows. Outdoor grow ops are more cost-effective than greenhouses.

Analysts at BMO estimate that Canopy spent $500 million on the B.C. greenhouses, a move described in its research report as a sign of “the undisciplined capital spending by previous management.”

In early February, a report by Ello Capital, a boutique investment bank for the cannabis sector, warned that large Canadian pot producers only have about half a year’s worth of cash before they run out. The report estimated that Edmonton-based Aurora Cannabis was near the bottom of the pack with a little more than two months of cash and that B.C.-based Tilray had nearly four months’ worth.

Days later, Aurora Cannabis announced it was laying off 500 people—25 percent of its workforce—taking a $1 billion writedown, and that CEO Terry Booth was retiring. The company said its cannabis production had dropped and it was dealing with costs associated with efforts to roll out cannabis edibles and vapes. Shortly after, Tilray announced plans to lay off 10 percent of its global staff of 1,443 to cut costs.

Herschel Gerson, the CEO of Ello Capital, said “Canopy has a ton of cash and isn’t in imminent danger.” He pointed to its deal with beverage giant Constellation Brand, the maker of Corona beer, which made a $5.36 billion investment in Canopy.

A big part of Canopy’s strategy for this year was bringing drinks infused with THC and CBD to market, part of a portfolio of “cannabis 2.0” products including vapes and edibles, which became legal in December. But the launch of Canopy’s pot beverages, including a line of sparkling drinks fronted by Seth Rogen, has been delayed several times. Last month, Klein told Yahoo Finance the THC in Canopy’s drinks was sticking to the inside of the cans. And even in legal U.S. states, drinks are among the least popular cannabis products, so it’s unclear if these investments will pay off.

Another major challenge for licensed producers like Canopy is oversupply according to Deepak Anand, industry commentator and CEO of CBD company Materia Ventures. He said companies mass-producing weed need to imitate craft suppliers by making products that people actually want.

“From a quality perspective, the bigger companies needed to look at what micro-producers are doing in terms of growing and cultivating their cannabis and what consumers are saying in terms of showing affinity towards those brands,” said Anand.

He expects “significant turmoil” in the industry this year with a lot of smaller companies going under or getting bought out by bigger names. He also predicts more job losses.

Anand said companies that will last are the ones that will create “a nice niche” for themselves with vapes, edibles, and drinks. And the ones that have lots of money, because “cash is king right now.”

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