The current state of Canada’s Cannabis 2.0 products

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August 4, 2020
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Introduction

Beverages, edibles, vape pens, and extracts, known as Cannabis 2.0 products, have been on Canadian store shelves since January 2020. This industry report will dive into the current state of the Canadian cannabis market, focusing specifically on Alberta, British Columbia, and Ontario. We will first analyze what the Canadian market looked like prior to the sale of Cannabis 2.0 products and how the market has changed with the introduction of these new product categories. To help frame this transition to Cannabis 2.0 products we will examine historical trends in developed US markets such as Washington and Colorado. Lastly, we will dive into what categories are driving sales in Canada and what segments we expect to play a significant part in Cannabis 2.0 sales growth. Sign up for a free Insights Pulse account to dive deeper into cannabis data.

Methodology

Data for this report comes from real-time sales reporting by participating cannabis retailers via their point-of-sale systems, which are linked up with Headset’s business analytics software. Sales data are cross-referenced with our catalog of over 500,000 products to provide detailed information on market trends. Headset’s data is very reliable, as it comes digitally direct from our partner retailers. However, the potential does exist for misreporting in the instance of duplicates, incorrectly classified products, inaccurate entry of products into point-of-sale systems, or even simple human error at the point of purchase. Thus, there is a slight margin of error to consider.

What does the total Canadian market look like today?

SALES BY CANADIAN PROVINCE & TOTAL CANADIAN MARKET GROWTH
Cannabis sales by Canadian province & total Canadian market growth

In this report we will refer to the “total Canadian market” as the sum of the three provinces Headset covers today: Alberta, British Columbia, and Ontario. Additionally, note that Headset only captures data from private retail in Ontario (e.g., exclusive of online government sales). The graphic above shows total sales broken out by Canadian province. As you can see, from October 2019 to March 2020 the total Canadian market saw healthy MoM sales growth, peaking at +14.8% between February and March 2020. In April there was a precipitous drop in growth, falling to -15.2% growth MoM, but jumping back to +13.3% the following month. The key takeaway here is that while many expected a market boom in January due to the introduction of Cannabis 2.0 products, much of that momentum was decelerated by COVID relate disuses. In this report we will dive into the Canadian market, starting in January of this year, and explore recent trends, specifically as they relate to the introduction of Cannabis 2.0 products (i.e., Vapor Pens, Concentrates, Edibles, Beverages, etc.)

What did the market look like under Cannabis 1.0?

CATEGORY SALES MIX - TOTAL CANADIAN MARKET

Prior to January 2020, sales of cannabis products were limited to only Capsules, Flower, Oil, and Pre-Roll categories. Canada is similar to many new markets in that sales from the Flower category tend to dominate. From March 2019 to December 2019, the Flower category made up between 78.8% and 67.3% of total sales, settling a tan average of 70.8%. Over the same period of time, Pre-Rolls averaged 19.7%, which is the second largest sales share of the four categories. The other two categories, Capsules and Oils, appear to be more niche than Pre-Rolls and Flower. Capsules and Oils averaged 3.1% and 6.3% sales share from March 2019 to December 2019.Now that there is a bit more context to the Cannabis 1.0 era, we will now dig into the introduction of Cannabis 2.0 products to the Canadian marketplace.

Introduction of Cannabis 2.0 categories

CATEGORY SALES MIX POST CANNABIS 2.0 LAUNCH - TOTAL CANADIAN MARKET

Cannabis 2.0 categories (e.g., Beverage, Concentrates, Edibles, etc.) started sales in January 2020 and the graphic above shows Cannabis 1.0 sales share and individual Cannabis 2.0 category sales share from January 2020 through July 2020. Additionally, we can also see Cannabis 1.0 (includes all 1.0 categories) MoM sales growth and Cannabis 2.0 (includes all 2.0 categories) MoM sales growth in the lines on the right y-axis. This graphic tells us a couple of things: 1. Vapor Pens are clearly the most popular 2.0 category and 2. Cannabis 2.0 sales growth was vastly outpacing Cannabis 1.0 sales growth until April 2020 when the two product groups’ growth converge. For the first point, this will come as no surprise to those familiar with more developed markets in the US and we will dig into this in more detail on the next slide. On the second point, the convergence of the 1.0 and 2.0 growth rates into a closely mirrored line is due to the fact that the COVID related sales issues in ON affected all categories similarly, resulting in nearly identical negative growth rates.

Category shifts in developed markets

HISTORIC SALES SHARE OF CANNABIS 1.0 VS 2.0 CATEGORIES - WA & CO

As alluded to in the previous slide, it is challenging to understand the introduction of Cannabis 2.0 products in Canada without having explored other examples in similar markets. In this slide we will explore how two historically Flower dominant markets, Washington and Colorado, developed over time with the introduction of new product categories. The line graph above splits apart category sales into two groups based on the category definitions of Cannabis 1.0 and 2.0 in Canada. The graphic shows that since Q1 2016 Cannabis 2.0 category sales shares have grown 8.4% quarterly in CO and 4.0% quarterly in WA, with Vapor Pens accounting for roughly half of Cannabis 2.0 sales. The key takeaway here is that Cannabis 2.0 products in Canada have plenty of sales share to grow into, and by using WA and CO as proxies for a developed marketplace, one could infer that Cannabis 2.0 products can grow into ~40% of sales with Vapor Pens accounting for at least half of the share.

Current category shares by province

CATEGORY SALES SHARE BY PROVINCE - MAY 2020

If we look at May 2020 sales data in AB, BC, and ON we can see where each province lands in terms of Cannabis 2.0 sales share. In AB, Flower’s sales share has decreased 15.8% from January 2020 to May 2020 while Vapor Pens have gained a 15.9% sales share as of May. If we look at BC we see that Flower still has a stronghold on sales. From January to May Flower sales decreased just 4.9%, suggesting that Cannabis 1.0 categories such as Flower and Pre-Roll may be slightly slower to relinquish share in the province in comparison to AB and ON. Similar to AB, BC has seen substantial growth in the Vapor Pen category, which captured 13.1% of sales in May. Lastly, in ON Flower sales decreased 9.1% from January to May, while Vapor Pens have captured 14.4% of sales. One clear takeaway is that Vapor Pens are likely to drive much of the Cannabis 2.0 sales going forward, but it is also clear that Edible sales are likely to be the second largest Cannabis 2.0 category in the market, which is consistent with what we have seen in developed US markets.

Edible segment preference changed over time in the US

CHOCOLATE & GUMMIES SEGMENT SHARE OF EDIBLE SALES - TOTAL US MARKET

In our initial look at Edibles above we will look at how the US Edible market has progressed over time. The line graph above shows the Edible segment share of Chocolates and Gummies over the past six years. If we start by looking at the data from 2014/2015, we see that Chocolates were the dominant segment when adult use sales first came online in WA and CO, but this changed as more markets opened and Gummies products became more widely available. As of Q2 2020, 61.7% of all US Edible sales go to the Gummies segment while just 14.5% go to Chocolates. It is also worth noting that the Gummies segment is the most popular Edible segmenting CA, CO, and NV. The only US state where Gummies is not the top Edible segment is WA, but this is due to government restrictions on the labeling and producing redient of Gummies type Edibles as opposed to the lack of consumer interest in the segment. Next we will analyze how we can take learnings from the US Edible market and compare these to the initial launch of Edibles in Canada.

Current Edible preferences in Canada

SEGMENT SHARE OF EDIBLE SALES - TOTAL CANADIAN MARKET

Looking at the launch of Cannabis 2.0 and Edible products in Canada we see that the Chocolate segment is off to a dominant start, capturing an average of 65% of Edible sales over the past seven months. This is not unlike the initial stages of the US market, which saw Chocolates capture 36% in 2015. The main reason for the large discrepancy in Chocolates initially in the US when compared to Canada is primarily that the US has many more Edible segments available to consumers (11 in the US, 6 in Canada). Another interesting finding that may be contributing to the relatively small share of Gummies sales in Canada is that there are few Edible brands that make Gummies. For example, in Canada there are 12 brands that make Edibles, but only two of them make Gummies. To put this in perspective, in the US there are187 brands that make Gummies. All of this data, when viewed together, suggests that Gummies in Canada are primed to see increases in sales share within the Edibles category and that there is an opportunity for new brands to enter the space.

Conclusion

The Canadian cannabis market has experienced significant sales growth over the past year, starting with the sale of only a few product categories (e.g., Flower, Oil, Capsules, and Pre-Roll) and expanding into Beverages, Concentrates, Edibles, Topicals, and Vapor Pens in January 2020. The introduction of these new categories to the market will greatly change the growth trajectory as well as the product landscape of cannabis in Canada. By using developed US markets, such as CO and WA, as proxies for the future composition of the Canadian market, one can expect to see rapid sales growth of Cannabis 2.0 products and a more even split of category sales share between Cannabis 1.0 and 2.0 products. Within Cannabis 2.0 categories, it appears likely that Vapor Pens and Edibles will lead the growth surge, and within Edibles we expect to see an increased sales share of the Gummies segment, which has become a dominant segment in US markets.

About Headset

Headset is a consumer data analytics platform that provides market intelligence for the cannabis industry. Our extensive Market Reports deep-dive into specific categories and aspects of the industry to help businesses better monitor the market and perform exhaustive category analysis. Reports are generated via aggregate, real-time transaction data to get a unique and thorough analysis of what’s happening in the cannabis industry as the data becomes available. Headset offers three distinct products that help retailers, dispensaries, brands, product manufacturers, distributors, and investors move ahead in the industry



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