Canada’s Cannabis Retail Landscape: A Journey of Evolution

Canada embarked on a daring adventure in 2018 when it legalized recreational cannabis. Since then, the nation has witnessed a remarkable evolution in its cannabis retail landscape.

In this blog post, we’ll dive into the insights provided by the recent Headset Canada Cannabis Report, shedding light on the numbers that illustrate the intricacies of this rapidly growing industry.

💡What is Headset? Headset is the largest dataset in Cannabis. Sourced from actual consumer transactions from one of their +3500 retail partners in the United States and Canada. Vetrina is a Headset partner, allowing for our clients to make choices backed by data.

The Blossoming of Brands

As the doors of legality swung open, numerous cannabis brands eagerly stepped into the spotlight. From May 2020 to May 2023, recreational sales skyrocketed by an astonishing 157%. At the same time, the market saw a staggering 369% increase in the number of brands.

It has been a game of innovation and experimentation, with both big and small companies venturing into uncharted territories and diligently building their brands.

Amidst this flurry of activity, customers craved something “new” and more choices. Visual differentiation emerged as a critical factor in capturing their attention. Brands recognized this demand and invest in creating eye-catching products to satisfy the appetite for novelty. The race has been to stand out from the crowd and build strong brand equity.

The cannabis market has matured, though, leading to a fascinating transformation. In 2020, a mere 21% of brands accounted for 80% of sales, highlighting a market concentration. However, by 2023 the landscape has shifted. Only 12% of brands now command 80% of the market share, marking the rise of the select few industry giants. While the playing field has narrowed, new brands continue to enter the market.

Changing Consumer Habits

While sales figures paint a promising picture, a closer look at customer behaviour reveals interesting patterns. Over the past two years, the average basket value has dipped by 15.6%.

Initially, it was assumed that customers would purchase more products at lower price points. However, this expectation has yet to materialize. The number of units per basket, which sits at 1.6, has remained relatively stagnant. This pricing compression has reduced the value of baskets while the quality of the sale has remained unchanged.

This trend could reflect challenges in selling in-store or the complexity of having too many choices without clear differentiation. Regardless, the number of units per basket presents an opportunity when we consider neighbouring US markets, where transactions consistently surpass 2.5 units.

Discounts and Inventory Management

Pricing compression doesn’t solely exist on the wholesale side of the industry; it also extends into retail through discounting. Discount percentages have become a critical lever for many retailers. In Canada, where most retailers cannot negotiate wholesale costs, even a small discount significantly impacts margins. With a 3.9% discount rate around 420 (2023) and an average of 3.3% - 3.6% this year, discounts may seem modest compared to other US markets, but they hold significant importance in Canada. As retail stores increase their SKU counts, discount deals are increasingly used as a tool to move aging inventory and keep sales flowing.

The Fierce Retail Battle

In the fight for supremacy, retailers have faced a fierce battleground. Retail growth has not come solely from same-store sales but from the proliferation of new stores and markets. In Ontario, the country’s largest market, the average revenue per store has declined 20% while the number of stores has surged by 40%. It is a challenging landscape where sliding average unit prices and increasing discount percentages continue to erode same-store performance.

Amidst this landscape of fluctuating fortunes, the province of Saskatchewan (SK) has emerged as an unexpected frontrunner for growth. From 2022 to 2023, SK experienced a staggering 24% growth rate, outpacing Ontario (7%), Alberta (14%), and British Columbia (19%).

What can we learn from Canada?

The Canadian cannabis retail landscape has been shaped by several unique factors, including the country’s strict regulatory environment. However, several trends observed in Canada are likely to be seen in other markets as well.

Key Takeaways and Lessons

1. Increases in brand presence: As cannabis markets mature, consumers seek variety and gravitate toward established brands. Brands must invest in building their presence and be ready to pivot when necessary.
2. Growth in discounts at wholesale and retail: To compete with the growing number of brands and retailers, many companies rely on discounts to differentiate themselves. This can lead to declining average prices as consumers become accustomed to paying less for cannabis products.
3. Consolidation: As the market matures, the number of brands may initially grow and then shrink as smaller brands gain traction and are acquired by larger companies. This can result in more concentrated markets with fewer dominant brands.

Consolidation often occurs in emerging industries as companies strive for economies of scale, operational efficiencies, and a competitive edge. While larger, established players may dominate the market, smaller companies can still thrive in specific communities.

It’s important to note that trends and innovations will continue to shape the cannabis retail industry. As the market evolves, consumer preferences may change, leading to growth in smaller categories and transformation in retail experiences. Technological advancements, such as loyalty programs and personalized consumer experiences, will significantly shape the future of cannabis retail in Canada.

Regulatory changes and shifts in public opinion can also impact the trajectory of the industry. As cannabis legalization becomes more widespread globally, the Canadian market may face increased competition from international players, leading to further changes in the competitive landscape.

While the future of the Canadian cannabis retail landscape remains uncertain, it is expected to undergo continued transformation driven by market forces, consumer preference, and regulatory developments.

Check out the complete Headset Report here.

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