HIghlights from Life Sciences.
Frederico Gomes, CFA 437.778.5172
We have updated our Canadian cannabis market forecast to include the most recent sales data and our view of industry trends. The methodology used remains unchanged from our previous report. In our base-case scenario, we expect recreational cannabis sales of $4.8bn in 2022e, $7.9bn in 2025e, and $12.2bn in 2030e, compared to our previous estimate of $4.9bn, $8.0bn, and $12.3bn, respectively. Our forecast implies a recreational cannabis market compound annual growth rate (CAGR) of ~13.4% from 2021e to 2030e, mostly driven by a higher percentage of cannabis prevalence in Canada to reach a total addressable consumer population of 10.1mm in 2030e (from 6.5mm in 2021e).
Who Stands To Benefit From The Industry’s Growth?
Our thesis is that the Canadian cannabis market presents a compelling long-term growth opportunity for select LPs and retailers. While the industry continues to struggle due to fragmentation and price competition, we believe that players with a lean cost structure, a robust capital position, and operational efficiency can successfully navigate this environment. An industry CAGR of +13% over the next nine years is already attractive, but even more so for companies that can gain market share and therefore outperform the industry’s growth. For LPs, our thesis is that the Canadian market offers a large upside to the valuations of mid- and small-caps that execute well—we invite readers to revisit our thematic report. For retailers, despite a congested setting (store saturation + deep discount competition), our thesis is that larger chains, such as High Tide and Fire & Flower, will ultimately benefit as mom-and-pops exit the market and consolidation occurs.
Market Sizing Assumptions
Our model has three key drivers, (1) Addressable population growth, (2) Avg. annual spending per consumer, and (3) Sales conversion from the illicit market. We calculate the addressable population of cannabis consumers based on Canada’s total population multiplied by the percentage of inhabitants over the legal age for cannabis consumption (~80%) and the cannabis prevalence among those legal age consumers. Our base-case assumes that prevalence will gradually increase from 20% in 2020 to 30% in 2030e, driven by increased social acceptance, the aging of younger generations, and new product introduction (e.g., cannabinoid-based health & wellness products). We also assume that the avg. annual spending per person will increase to $1,371 by 2030e (from $1,170 in 2021e), driven by inflation (~1.8% CAGR). Finally, we estimate that the illicit market sales penetration will decline from 40% in 2021e to 5% in 2030e, driven by expanded legal market access through an improved retail infrastructure, lower legal market pricing, and the launching of new cannabis-derived products unavailable to the illicit market. See report for our bear-case and bull-case scenarios reflecting different assumptions for our key drivers.
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