The race to the bottom in prices is good for consumers but bad for growers, says Darren Brisebois, President of OGEN Cannabis, which closed the doors at its Calgary facility last week after going into receivership.
The company, which suddenly had to let nearly ninety employees go after hearing the news of receivership from their lender, has around 25,000 cannabis plants at various stages of production now scheduled for destruction. Its vaults, though, are mostly empty, says Brisebois, with their products selling quickly into several provincial markets.
Moving product wasn’t enough for OGEN to keep the lights on and payroll fulfilled. The company was at a difficult crossroads, he explains, struggling with the debt taken on to build their 60,000 sq ft facility (35,000 sq ft of cultivation space) while seeing the cost of cannabis products continue to drop.
The only path out that he could see, continues Brisebois, was to increase production somehow to lower the overall cost per gram to be able to eke out a profit in a market with wholesale indoor dried flower going for under $2 a gram, and production costs often over the $2 a gram mark. While his facility was producing about 5,000 kilograms of cannabis a year, he figured he needed to double that within the same facility to pay his bills and bring in a profit.
“We’re chasing this down, and the only way to be sustainable is to produce more. All of our costs are fixed.”
“Everyone on the market, they want to buy it for a buck, buck fifty right now,” he adds. “And the smaller producers can’t get the economies of scale that I have. So if you’re a small producer, I can’t see you getting below two (dollars a gram), indoor.”
The other big problem, he says, is government taxes and fees, both at the federal and provincial levels.
“When I look at my profit and loss statement, I’m paying somewhere between forty and forty-five percent right off the top to various government agencies. The selling price is now well below the cost of production.”
In addition, as more companies are closing and their supply gets sold at below-market rates, prices are further eroded, creating a downward spiral.
“The B2B market is really a big factor in this with a lot of different facilities closing. That puts even more downward pressure on the selling price per gram.”
Brisebois says the decision to close was not his, it was at the discretion of their lenders as well as pressures from the CRA.
Despite this need to get bigger, he says he also sees the pitfalls of growing too large and taking on too much debt—something he attributes to the early days of legalization when the industry was flush with cash.
Being small carries some advantages, but he thinks it can be a bit of a trap where it’s tough to really grow as a business.
“I wouldn’t want to be really big. I would rather be really small, frankly. And maybe there’s a labour of love in it. But it’s a catch-22 because maybe you can break even on that scale. Then how do you grow to establish yourself across the country?”
Another issue, he says, is the increasing cost of power in some parts of the country. In Alberta, this has been increasing significantly, contends Brisebois. Although he was able to lock in a low rate a few years ago, if paying current market prices, he says he would have seen his monthly electricity bill double from about $170,000 a month to more than $300,000.
This is exacerbated by an increasing cost to build, meaning anyone wanting to expand right now will have a hard time, especially with capital markets shunning most of the cannabis industry.
The future is probably somewhat bleak, he says.
“I think there’s going to be a handful of companies that will own portfolios of brands. I see a consolidation of market share.”
Companies will continue to swoop up the successful brands, he says, or just start their own brands with distressed assets they get from other closing companies. This is ultimately driven by consumer demand and what provinces buy, and is impacted by an enormous amount of regulatory and tax burden.
“It’s a very price-sensitive market. Price and THC. It’s really unfortunate, but that’s how it is for most consumers.”
Featured image via pancakenap.com