Second Quarter Legal Pot Sales Beat Black Market Sales For The First Time
Canada’s 2018 Cannabis Act opened the door for companies that believed selling pot would make their investors happy. Using marijuana is as common as drinking a beer these days, thanks to the legalization of recreational pot. But not all the pot-selling enterprises are laughing their way to the bank. Thanks to government regulations and the costs of doing business in the Maryjane business, legal cannabis companies still feel the pain of marijuana’s illegal pot business.
Pot companies in California face some of the same issues as Canadian companies. In order to compete with the black market, legal marijuana companies made price adjustments, and those adjustments had a major impact on bottom-line profits.
The Canadian government recently updated its quarterly nationwide marijuana sales numbers, and that report shows household spending on illegal pot in the second-quarter of 2020 totaled C$785 million. That’s a 4.7% drop from the first-quarter sales. Legal pot sales in the second-quarter totaled C$803 million. That total includes C$648 million in recreational sales and C$155 million in medical marijuana sales.
Legal Pot Sales Are Up But Gross Margins Are Down
Based on those figures, it appears the legal pot business is on the road to higher profits in 2020, but that’s not the case. Several legal marijuana brands decided to drop their per gram price in order to put a dent in the illegal market. Original Stash, a popular price brand owned by HEXO, offered its customers a price of C$4.49 a gram, including the government tax. The average price of illegal weed is in the C$5.73 a gram neighborhood, so HEXO’s gross sales in the second-quarter jumped to C$30.9 million. Last year, HEXO’s same-quarter sales were C$15.9 million.
At first glance, the per-gram price adjustment seemed to work, but it only generated an increase in gross margin of C$2.4 million. When HEXO paid all the costs and taxes for that quarter, only 28% of the gross margin remained. Last year’s gross margin remainder was 40.3%. The fly in the gross margin ointment is the fact that the excise taxes are a flat-rate duty tax. Lower priced pot produces a higher excise tax per gram. Even though HEXO has other marijuana brands, Original Stash was the sales-driver in the second quarter. And the brand’s sales jump due to lower per gram prices created an increase in tax liability.
Slimmer Margins Hurt Pot Investors
HEXO is not the only marijuana company to feel gross margin pressure. Pot companies that offer a value marijuana brand experienced a significant decline in second-quarter gross profits. The average price of pot per gram is now in the C$4.33 neighborhood. A year ago, the average price was C$5.48 per gram. That’s a 21% decrease.
Even though legal pot companies put a dent in the illegal weed sales in Canada, the end result may be bad news for marijuana investors. Lower gross margins usually mean lower profits. Pot investors may not stick around if gross margins continue to move in the wrong direction.
