This report explores sales trends in Canada, specifically sales since November 2020. In our analysis, we found a sales decline in November that can mostly be explained by the nuances of the calendar year, with November 2020 having one less weekend than the prior year. After examining like-store sales in AB, BC, ON, and SK, we found sales partially recovered in December with sales through the holidays seeing mostly strong growth. However, sales were weak in the last week of December and first two weeks of January in all markets as consumers faced lockdowns due to COVID.
On average, one less weekend can cause a -2% MoM drop and one less calendar day a -1% MoM drop. This means November 2020 would be -3% in the hole simply because of the calendar. Comparing this period to October-November 2019 can also be misleading because November 2019 had five weekends and October 2019 had four, which gave November 2019 a +2% advantage. Furthermore, most of the Oct-Nov 2019 growth was driven by British Columbia alone (due to increased licensing in BC), without which the Canadian market would have already been up by +1% from the one extra calendar day.
Sales in the first three weeks of January were relatively soft, though we should bear in mind that most stores were closed on January 1, making that week a 6 day week. That day also happened to be a Friday, the strongest day of the week for cannabis sales. Sales continued to trend downward in week 1 and 2, but in AB and SK sales slightly rebounded in week 3. Lockdowns continued to negatively impact sales in Ontario, but sales declines have not been as sharp as those experienced in the early summer months. Buy-in (or orders from retailers to producers) may be impacted over and above sell-thru trends as we see in Ontario inventory carry levels are declining. This means, orders likely saw larger declines than sales trends are demonstrating.
This softening of sales in December and January trickled through to LPs, especially in Ontario, as we find that retailers have been drawing down their inventory with average inventory levels sitting at 70-80% their normal levels in Ontario. Ontario retailers likely reduced their orders due to fears of large decreases in consumer demand during lockdowns (drawing on past experiences in April and May). Thus, while consumer demand has been weak in Ontario in the early winter weeks, we anticipate orders to LPs to show even larger negative trends due to the decreased inventory levels as retailers are not replenishing products purchased at 100%. This trend of selling down inventory seems to have stabilized in the later weeks of January and we expect more normal purchase patterns from retailers in the future.
There has been some reporting about the November slow-down in sales in Canada cannabis based on reports by Stat Can. In this report, we review Stat Can data and point out the seasonality inherent in November sales. We also issue a word of caution for using year over year measures in 2021 to discern growth trends as the pandemic has left us with trends that make year over year comparisons fairly useless and could result in needless alarm.
When working with unadjusted data, we first need to keep in mind the calendar and the tricks it can play. Blame Julius Caesaror Pope Gregory XIII if you would like, but be sure to not let calendar changes trip up your analysis. The first step in comparing month over month sales trends should always be to normalize the data. We first do this by comparing not just total sales ,but also average daily sales (knowing that months have different number of days).
What stands out here immediately is the“downturn” in sales reported by many in November was actually slightly up.05% over October, after adjusting for the number of days in each month.
However, the number of days in the month wasn’t the only factor at play. We also need to observe the days each month has. For example, October 2019 enjoyed5 Fridays and 5 Saturdays, whereas November 2020 only enjoyed 4 of each. At first, the difference may seem minute, but we’ll show you why that’s not the case in the following slides.
Below we look at Adult-Use cannabis sales as a % of the total week for four Canadian provinces (AB, BC,ON, and SK) combined based on sales between August 1, 2020 and October 2, 2020. The purpose of this analysis is to demonstrate how a 30-day month can appear different simply based on its share of Fridays/Saturdays. To start, we notice that Friday see 16.8% of total cannabis sales, making Fridays(on average) about 36% larger than Mondays.
Looking at November 2020 vs November 2019, we see that something unusual happened in November 2019. This 30-day month had 5 Fridays and 5 Saturdays (compared to 4 Fridays and 4Saturdays in November 2020). As a result, it is difficult to compare these two months as November2019 got an extra Friday and an extra Saturday whereas November 2020 got an extra Sunday and an extra Monday. Looking at the pie-chart above, we know that having that extra Friday and Saturday would be a significant boost in sales for the month. Thus, part of the depressed sales in November2020 were due simply to a calendar trick, rather than sales that came in softer than is usual.
Let’s assume that we are in a stable market and every week there is $1000 of sales, but the market shows a distribution of sales across days following the pie chart to the right (with 16.8% of sales on Fridays and only 12.2% on Sundays). If the days of the months were distributed similar to November2019 vs. 2020, we would find that sales for the month with 5 Fridays/Saturdays would be $4,322,which is 1.8% larger than sales in the month with4 Fridays/Saturdays. This happens only due to the way the weeks are distributed and not because one month is larger than the next. This is why most retail analysts rely on a 4-5-4 retail calendar instead of simple month over month or year over year analysis.
In addition to the distribution of high volume weekdays within the calendar, there are other reasons why we should be cautious when comparing month over month or year over year sales totals. As an example, we look at the year over year sales difference in October and November 2020 vs 2019 below. Sales between October and November 2019 were up 5.2% from $130M to $137M. This increase in sales does not represent a seasonal trend as displayed below.
Looking at sales growth between October and November 2019, one might believe that there is a seasonal pattern leading to an increase in sales in November over December. However if we diagnose that growth, we can see that most of the growth occurred in British Columbia. In fact, sales in BC were up +47% from October 2019 to November 2019. The growth in BC was so large that it off-set negative sales growth in four other provinces.
The growth in the BC market was due toan increase in licenses being issued and new store openings rather than a season altrend, which we can expect to continue into coming years. This is why we often caution using year over year comparisons in high growth markets. This caution extends to any year over year comparisons of 2020 data as COVID has displaced many typical trends.
With everything we have examined above, we find no reason to believe that November was un usually soft or represents a systemic downward trend in cannabis sales in Canada. Before we make assumptions, we will look at median like-store sales growth in our Headset sample of 300+ retailers in Canada. Like-store sales growth is a useful measure to understand growth without the influence of new store openings.
In Canada, we find in both 2019 and 2020sales generally slowed slightly between weeks 39 (mid-late September) and 48(end of November) before picking back up again as the holidays approach. This time range is framed in the graph to the right .This trend is common in the US as well as Canada, as consumers begin preparing for the holidays. We find 2020 to be atypical year and December to have picked up sales in a similar fashion. It is worth noting the large declines in week 49 and 52 and large growth in week51 in 2019 with a slightly more even trend in 2020. These spikes are, yet again, due to tricks of the calendar based on when the Christmas and Boxing Day holidays fall within the weeks.
While November and December do not appear to show a slow-down in sales, we find this trend does not hold through the first three weeks in January. While we generally see sales declines shortly following the holidays, we see these declines accelerated through the last few weeks with Ontario (private market sales), which is currently under lockdown, seeing the starkest falls. In contrast, while sales have fallen in AB and SK we see that weekly sales are still elevated above their early November levels.
Here we examine sales in December 2020and January 2021 more closely. This data is based on our Headset sample of stores(as Stat Can has not yet released December or January data). This examines sales at stores which were open on 11/2 and tracks their sales growth in the following weeks .We find some concerning like-store sales declines in Ontario in particular, likely related to the current COVID lockdowns .While all markets are down, it appears that both AB and BC are showing stabilization/growth. We will re-examine the data again in the near future to see how this trend has changed .Some of the trends (for example Ontario)likely represent softness due to lockdowns .Some are more seasonal in nature, like Alberta. Both trends are examined further below.
Late winter months tend to exhibit some softness in cannabis markets. Here we compare winter2019/2020 to winter 2020/2021 in Alberta using Headset’s sample of private retailers in Alberta. We see sales growth in 2020/2021 was slightly above 2019/2020 and remains elevated despite the most recent downward trend.
Most markets see stagnant sales growth in the winter months, and Alberta is no exception. However, sales in winter 2020/2021 appear to be slightly above trends of winter 2019/2020 with strong growth through the holiday season. Last year, the introduction of cannabis 2.0 products in late January helped to boost demand. This will make year over year trends more difficult to analyze going forward. In addition, the impacts of COVID starting in early March will make this trend even more difficult to compare year over year data. Looking at these two trends side-by-side, we can discern that the downward trend we are observing in late December/early January in Alberta is actually slightly above the trend from the prior year and should not be a cause for concern.
Ontario has seen the largest lockdown impacts for cannabis retailers, with sales plummeting during the full shut down in early April and recovering slowly during the following 10 weeks. New lockdown restrictions in Ontario were likely causing store managers to recall the slow summer and anticipate sales declines during this time. In this slide, we examine like-store sales growth of the Headset retailer sample in Ontario to examine the impact on private retailers as a result of the COVID-related lockdowns in Ontario in the summer months.
Armed with information about the impacts of the last lockdown, we anticipate that store managers were aware of the upcoming sales declines and likely pulled back their ordering through December and into January. Thus we anticipate stores will likely order less during this time (and have ordered less through December) to be cautious given the downward trends experienced over the summer. We believe the good news is that the impact of the lockdowns in January were much smaller (with like store sales at closer to 75-80% their pre-lockdown levels) compared to April and May lockdowns, which dipped sales to less than 50% their pre-lockdown levels. It is difficult to forecast how quickly consumers will come back into stores, but we anticipate the most recent weeks’ trends to begin to wane in the short term and these trends will reverse after the lockdown in Ontario is lifted (currently set to expire on Feb 11th).
Occasionally, sell-in and sell-thru data lose their correlation. The numbers presented above were sell-thru data (meaning, sales from retailers to consumers). Another measure we use at Headset is the median inventory value. This measure examines our sample of retailers and finds the median retail value of inventory for a retailer in that sample. Below we examine how inventory levels have changed over the last 15 weeks of 2020 in the Flower category.
Here we see that in Ontario, the median retailer has generally been declining. This is occurring for two reasons: (1) retailers have been selling down a bit more of their inventory than is typical and (2) the retailers that opened in November appeared to have smaller inventory levels than those that opened in prior months as well as lower sales volumes. We investigate the sell downtrend in ON on the next slide. In contrast in Alberta, inventory levels demonstrated their typical seasonal trend of growth through the holidays. Thus, while in Alberta we expect orders from retailers to generally correlate with sell-thru data, in Ontario we expect order volumes to be declining even more sharply than retail sell-thru trends predict as this sell-down in inventory means fewer or smaller orders from retailers.
Here we examine daily inventory trends. This represents the total units the median retailer had on handback day. For this analysis we look only at like-stores (stores that were open on or before August 1st) and take the median number of Flower units the retailer has on-hand. Most notable is the overall downward trend from July. This helps us understand the stark drop in the prior slide. Seeing the trend in like-store sales tells us the drop was, at least partially, due to decreased carry by currently operating retailers.
Here we see the weekly cyclical nature of inventory being highest on Thursdays and most depleted on Mondays. A few things that stand out are evidence of unusual supply chain behavior during the first week of August and last week of September into early October. There appear to have been either reduced orders from retailers or shorted orders during this time as these are median retailer trends. The decline in inventory carry-levels means we anticipate retailer orders to LPs to show a more pronounced negative trend when compared to consumer sell-thru (or consumption). We see that average inventory carry levels declined between 30 and 40%,meaning for every 10 items a retailer sold to a consumer they only purchased 6 or 7 items from an LP. This trend, combined with the lower consumption levels (detailed on prior slides) means we expect orders from retailers to LPs to be much lower in Dec and Jan. However, with the recent stabilization of retailer inventory carry and purchase volumes we expect this trend to abate as we move into later winter months.
As we discovered, having one less weekend and one less weekday in a month can make it seem like sales are trending down month over month. But when we dug into November cannabis sales in Canada and looked at average daily sales, we found that November 2020 was actually slight up by .05% over October 2020. We also found year over year comparisons to be misleading as well, since unusual events like a pandemic can create dramatic differences in trends. While we didn’t find a slowdown in sales during November and December, we did uncover some softness in the cannabis market in the first three weeks of January due to seasonal shifts and COVID lockdowns. There is some evidence of stabilization and growth in Alberta and British Columbia, but we won’t know for sure until we re-examine this trend in the future.
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