Five years ago, Yahoo Canada News did a series on the dying small towns of Canada. The stagnation was largely blamed on the exit of one industry or another from many of the places visited. One of the towns featured in that series was Smiths Falls, Ont., struggling to recover from the exit of chocolate maker Hershey’s in 2007. At the time, residents said tourism was the answer to the town’s economic woes. Little did they know the industry that would breath life back into Smiths Falls was cannabis.
Entering Smiths Falls today, the town is a distant cry from its struggles of 2013, and that’s largely thanks to Tweed, one of the brands of Canopy Growth (WEED.TO).
Bruce Linton, Founder, Chairman and CEO of Canopy Growth, says he keeps tabs on how many new restaurants have sprung up around town in the last year or so as a measure of its economic success.
“The current answer is four have started,” says Linton proudly in an interview with Yahoo Canada Finance. “And they’re all very good in a town that had, really, your choice between Dairy Queen, McDonald’s, and a couple of rundown pizza joints. And now it’s coming up.”
But as one of the biggest players in medical marijuana, and soon in the recreational marijuana industry, Canopy Growth is looking to do more than revitalize a town.
“In some circles they would call it corporate social responsibility — I think that’s a bunch of crap, because corporations are not socially responsible,” says Linton. “What they are is responsible to the future of the corporation and the potential earnings. But if you’re actually long term thinking, you know that what you want to do is use everything you can that’s local. Be as supportive and integrated as you can. Because this town was in desperate state when I bought the building.”
When Linton started Tweed in 2014, he began with just 30 employees. His workforce grew to 300 by 2017. This year, it’s up to 800. And the company has 900 more job openings to fill. From PhDs to marketing leads to production workers, Canopy Growth is looking to fill positions not just at Tweed in Smiths Falls, but at its facilities across Canada.
M&A? No way
While Canopy is looking to expand rapidly in terms of hiring, there’s one area where the company is bucking the trend of other cannabis industry heavyweights: it’s not interested in any more mergers or acquisitions at this time.
“I think if I acquired anybody that’s out there, I would probably have to rip everything out they’ve built and redo it our way, because we’ve built so much ourselves,” says Linton. “Basically, I’d be acquiring an iPhone 2 when I’ve already invented the iPhone 11.”
It’s in stark contrast to the recent actions of Aurora Cannabis (ACB.TO), which just closed its $3.2 billion acquisition of MedReleaf. The last acquisition by Canopy Growth was in early July, when it purchased cannabis supplier Hiku, which includes well-known Toronto-based cannabis retail brand Tokyo Smoke. The company is looking to find spaces where it isn’t already fully present in order to reach a broader consumer base.
“I think you will see as we’re doing with Hiku, acquisitions moving up,” says Linton. “You know, someday I’ll probably buy a biotech company. And you say, well, why? Because I’m not going to share our margins with the pharma company. We’ll just bake our own pharma company. That’s where we’re going.”
Charles Taerk, President and CEO of Faircourt Asset Management Inc., says that it’s not a bad plan for Canopy to pull back from acquiring other companies for now.
“This is an early-stage sector, and there’s going to be more M&A activity,” sayd Taerk. “But mergers and acquisitions don’t always necessarily work out. There’s some skepticism as to whether the Aurora takeovers of Cannimed and MedReleaf are going to pan out because there really hasn’t been a lot of information provided by Aurora as to where the synergies, where the efficiencies are, how everything is going to be integrated.”
Taerk explains that each of these big players has unique operational aspects, and he says Canopy Growth has become a good cultivator and processor on its own. It makes less sense to take over a company because they have square footage for more cultivation, since the cost to cultivate and generate capacity for more cultivation will be less integral as the market establishes.
Even as Canopy expands its footprint overseas, Linton says he doesn’t currently see value in acquiring others for more square footage.
“In Canada, I don’t need any more capacity I think ever,” says Linton. “What I have to do is continually evolve from production, so that it becomes subordinated into being an ingredient. The conversation we’re having about production right now, in another 18 to 24 months, [competitors] will be saying ‘well, we have production,’ and they’ll be saying ‘gosh I wish I had finished goods.'”
Norman Levine, Managing Director for Portfolio Management Corp., agrees that Canopy has, based on speculation about how the recreational market will play out, positioned itself as best it can ahead of recreational marijuana legalization in Canada in October.
“From a ‘ready for rec[reational]’ perspective, Canopy is certainly well out in front. They have a combination of strengths,” says Levine. “First, the agreement both for equity and partnership on innovation with Constellation Brands, that was very early and well ahead of anyone else. Secondly, their current cultivation — not just that they have more cultivation than everyone else — they have been building up inventory, so they’re ready from a provincial supply standpoint that they have been winners in initial supply agreements, but they will also likely be winners when some of their competitors can’t fulfill their supply obligations, or the second round, the six months after it’s legal.
“If people don’t have enough current capacity, here’s Canopy with more than enough capacity to fill up where some provinces may be short.”
Looking to what comes next
While legislation around the marijuana edibles market is still up in the air, many companies are betting big that beverages will be a hit with consumers when that legislation comes to pass. Molson recently entered into a deal with Hydropothecary to develop cannabis beverages. Earlier this year, both Aurora and Aphria (APH.TO) entered into deals with beverage producers to boost their presence in that market.
Canopy made a deal ahead of the rest of those companies, exchanging a 10 per cent stake in Canopy for a $245 million investment from alcohol supplier Constellation Brands.
“I’ve joked before, I think the entire reason we learned how to fashion clay and do pottery is they needed someone to store wine,” says Linton with a laugh. “Like, that wasn’t about water, for sure.
“And so I think the effect of that is it’s such a normalized social lubricant. I believe that when cannabinoids are the driver and not alcohol, people will say, I do have no problem finding enough calories elsewhere. I’ll take the zero calorie mood modifier…I think beverages done on a big scale are going to be hugely disruptive.”
But Canopy isn’t limiting itself to just cannabis-infused beverages. The company’s research and development department is exploring various consumable options, but is keeping exactly what it has in store tightly under wraps for now. Based on what they’re researching, however, it’s safe to say they’re way beyond just pot brownies and marijuana-infused gummies.
“We’re going to make anything and everything that’s lawful,” says Linton. “And we hope that [politicians] don’t decide that gummy bears are a great idea, because that’s just a tricky format to hide some bad oils. And it’s kind of weird format if you’re trying to say we don’t market to children.”
Levine agrees that diversifying consumable product offerings is a smart plan, because no one knows what consumers will end up really adopting.
“The larger companies should have a toe-hold in everything because they don’t know what’s going to work and what isn’t going to work,” says Levine. “Just because they’re coming out with cannabis-infused beverages, they may be popular they may not be, you don’t know. Some edible products may work, they may not. If you’ve got your toe in these things without committing too much to it, you’re there if it works, but not everything’s going to work just because it has ‘cannabis’ in the name.
“If somebody like Constellation Brands wants to pay you a humungous amount to produce cannabis-infused beverages, you’d be crazy not to.”
Not for the meek investor
With so much buzz around marijuana companies ahead of recreational legalization, many investors are curious whether they should take the plunge and put their money into one of the many cannabis companies out there now, including Canopy. But right now, investors need a pretty strong stomach to weather the ups and downs of some of the most volatile stocks on the TSX.
“I have investors calling me asking why the stock went down three per cent today. Well, why did it go up five per cent the day before?” says Linton.
If there’s no tangible news, he says their guess is as good as his, and it’s just a matter of life for all publicly traded marijuana comapnies right now. Taerk says that at this stage, the volatility is to be expected, as investors aren’t quite sure what to make of companies like Canopy as they prepare for October 17.
“[Canopy’s] growing quite quickly, they’re not yet profitable, so from a cash flow perspective, they are spending a lot of money,” says Taerk. “Some investors are worried that the cash burn may catch up with them. On the other side, they’ve raised a lot of capital, and the cash burn is temporary in anticipation of when rec comes on stream and being able to significant revenue. Their one weakness would be their quarterly financial statements, but that’s temporary in nature when you’re looking at an early-stage sector.”
But Levine says there are too many unknowns at this stage to confidently invest in any cannabis stocks.
“I wouldn’t do it, not now,” says Levine. “I preface this by saying marijuana stocks – which are sin stocks, like tobaco, alcohol and casinos – are usually great investments. The reason is there’s a limited number of players, they have high margins, they have strong brands, and their customers are generally addicted to their product. As an investor, you can say with some certainty they’re going to grow.
“But you don’t have any certainty [with marijuana stocks] into any of the above what the sales are going to be. You’ve got way too many companies chasing a market here, so there will be lots of losers. Until you know how things are going to sort out, you don’t know what you’re doing.”
Linton, however, remains confident that while he can’t speak to what his competitors are doing, his primary concern is what impact their choices will have on the marijuana industry as a whole.
“I’m more worried about if companies have falsely high market caps and I know what their actual production in sales will be over the next 12 months, I’m more worried they’re going to implode and damage the sector,” says Linton. “So my principal worry is people who put out too many press releases and not enough product…I’m more worried about that frankly, than I am somebody passing us.
“We don’t particularly spend much time looking in the rear view mirror.”