Can Smaller Cannabis Companies Compete when Customers want Cheap Weed?

The below article by the Market Watch is interesting. It is simple, from the large corporate cannabis companies, Canadian customers want good cheap marijuana. Basically, customers are looking for a Bud Light of cannabis, affordable, mass-produced, and dependable taste. However, for smaller cannabis companies, this model will not work. Smaller Cannabis companies need to use the craft beer model, for producing high-quality cannabis, that stands apart from the mass-produced cannabis. Brand development and Brand ID will be essential for smaller and less efficient companies that can not compete with more efficient major cannabis companies. Creating this branding will allow the Craft Marijuana companies to charge premium prices, even though customers want the cheapest weed possible.

Smaller companies have tighter margins while fighting to create market share. Creating market share is a must for small cannabis companies. Carving out market share means smaller cannabis companies must create a brand that resonates with the cannabis consumer. Resonating with cannabis consumers means a company creates a high-quality product that connects with their customer base. Currently, we have seen this model work in the Craft Beer industry. The Craft Beer industry does not compete with the Budweiser's and Coronas of the world. Additionally, the Craft Marijuana companies should have lower overhead, which will allow them to competitively price their products.  The below article speaks to some of the issues corporate cannabis is facing with the Canadian cannabis market.

Forward by Landon Dais
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Article by Max Cherney:

Canadians want cheap weed, which isn’t great for companies that want to make expensive cannabis.

Cannabis companies in Canada have long promised “super premium” products, some going as far as predicting demand for $100 grams of the plant. Canadian consumers are heading the other way, however, as Aurora Cannabis Inc. ACB, +7.48% ACB, +5.10%  outlined Thursday in an earnings report that revealed quarterly losses of more than C$1 billion.

Chief Financial Officer Glen Ibbott said in a conference call that 17% of the Canadian cannabis market was purchases of cheap weed — less than C$9 ($6.79) a gram — as of December, up from just 2% over the summer. Meanwhile, premium pot went from a market share in the mid-30% range to 17%.

“So, [it took] a hard turn,” Ibbott said in the call.

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Aurora focused on high-grade cannabis at its Whistler facility and in specific brands under Chief Executive Terry Booth and former Chief Corporate Officer Cam Battley. Aurora changed its leadership, however, and executives said Thursday that it plans to launch a cheaper brand called Daily Special.

Aurora’s statements in the call Thursday reflect a broad trend in the sector across Canada, in every jurisdiction — people who enjoy and buy cannabis want cheap, strong weed and will speak with their wallets, according to PI Financial analyst Jason Zandberg. Pressure for inexpensive pot was nearly inevitable, he said, but Zandberg and industry executives were caught off-guard by how quickly the demand arrived.

“Clearly, there is more production of cannabis than demand, but I didn’t expect downward pricing pressure for weed this soon, just over a year into the legal market,” Zandberg said in a phone interview late Thursday.

Demand for less costly marijuana has already driven down the price at which Aurora can sell its weed by 10%, to C$4.76 a gram, in just three months, and Zandberg said his team expects a similar drop in the current quarter. Aurora is paying the same costs for growing, packaging and selling pot, which means lower margins, Zandberg pointed out.

Full earnings coverage: Aurora Cannabis shares rise after a dire earnings report and $1 billion loss

Cheaper weed may also hurt Aurora in other ways. The company recently promised its bankers that in exchange for easing its immediate obligations, it will report positive earnings before interest depreciation taxes and amortization by the end of the fiscal year. Failing to do so would breach the terms of C$162 million of senior secured term loans.

“Aurora faces a lot of headwinds,” Zandberg said. “When you start to see the price of cannabis decline, it’s going to be harder to hit that [Ebitda] milestone. They’re not especially cash-rich for an organization of its size and there are a lot of factors at play here.”

The desire for cheap marijuana also damaged Supreme Cannabis Co. Inc.’s FIRE, -8.64% SPRWF, -9.18%  results — the company cited demand for cheaper weed as one of four reasons why it abandoned its fiscal 2020 guidance Thursday afternoon.

Aurora’s U.S.-traded shares added a penny to $1.47 in Thursday trading following the earnings report. The Cannabis ETF THCX, +4.64%  closed up 0.2%.