"There's an argument that as legal cannabis prices increase so is spending in the illicit market, and that's not completely true," says Zachary Pendley , EY Canada Cannabis Real Estate and Valuation Leader. "The reality is that retail and distribution frameworks across Canada have been implemented much slower than anticipated, pushing many consumers to look for alternatives. As the industry matures, access to product eases and higher margin derivatives come online, we'll see a rise in consumer spending on legal cannabis."

EY analysis indicates that if current and planned facility expansions of over 14+ million square feet are completed and licensed in a timely manner, the supply of cannabis production in Canada will outpace demand in less than five years. This will increase competition and drive down commodity prices, resulting in the average wholesale price for dried flower to likely be between $4-$5 by 2025. However, achieving this level of supply requires significant capital investment, which can be more than $250/ sq ft.

Research shows that the Canadian direct cannabis market will grow 50% to $11 billion by 2025. Consumption will mostly be split between dried flower (46%) and extracts (37%), with a small percentage to edibles (12%) and non-edible derivatives (5%).

"Despite projected growth, Canadian licensed producers still face a lot of uncertainty as they navigate an immature and undefined market," says Pendley. "Unclear regulations around edibles, for example, make long-term capital allocation decisions a challenging task. Managing these unknowns, coupled with rising competition, is putting more pressure on producers to maximize output in the most cost-effective and efficient ways."

Pendley adds: "Canadian licensed producers should look to strategic joint ventures and partnerships as a way to navigate the regulatory landscape, access greater capital and enter new markets – both in Canada and internationally."

Read more cannabis insights at ey.com/ca/cannabis

About EY

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

For more information, please visit ey.com/ca. Follow us on Twitter @EYCanada.

EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

SOURCE EY (Ernst & Young)

For further information: Sasha Anopina, [email protected], 416 943 2637; Victoria McQueen, [email protected], 416 943 3141; Camille Larivière, [email protected], 514 879 8021

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