Canadian cannabis giant Canopy Growth announced on Wednesday plans to shut down 3 million square feet of greenhouses. The scale-back will result in the layoffs of 500 employees, as well as the elimination of plans to open a third cultivation facility in Ontario.
Just four months ago, Canopy Growth was expanding its company through heavy endorsements and affiliations with A-list celebrities. Backed by a long list of public figures, the company quickly rose to be the world’s largest cannabis company by market cap. Now, Canopy Growth claims they over-projected the market’s development.
“Nearly 17 months after the creation of the legal adult-use market, the Canadian recreational market has developed slower than anticipated, creating working capital and profitability challenges across the industry,” the company said in a statement.
To a consumer, cannabis has become the biggest trend across all industries. There’s cannabis-infused makeup, CBD home remedies, even food recipes and chain restaurants have begun to capitalize on the popularity of marijuana. But the market isn’t struggling with consumer interest. Their biggest struggle has been legislative limitations.
“Federal regulations permitting outdoor cultivation were introduced after the Company made significant investments in greenhouse production,” Canopy Growth said in a news release.
The company claims outdoor cultivation to be much more cost-effective. But when the company first began cultivating in February 2018, outdoor growing was an option. It wasn’t until June of 2018 that the Canadian government passed a bill permitting it. By then, Canopy was already thriving and had established its two huge greenhouses.
Another challenge the company has faced is delayed supply for China, due to the coronavirus outbreak. A combination of oversupply in costly-greenhouses, along with delayed production of vape pens supplied from China, resulted in its falling profit margins and cash burn.
CEO David Klein added in the company’s statement: “Although the decision to close these facilities was not taken lightly, we know this is a necessary step to ensure that we maintain our leadership position for the long-term.”
The scale-back will shut down greenhouses in Aldergrove and Delta, British Columbia, which account for more than half the company’s cultivation in Canada. Canopy Growth notes its over-production saying the company’s annual production capacity is around 500,000 kilograms compared to the market’s sales of about 200,000. Additionally, they called the greenhouses, “no longer essential to its cultivation footprint.”
The closures are expected to result in a C$700 million (US$523 million) to $800 million pre-tax charge on its earnings during the first quarter of 2020, which ends March 31.
Shares of the company fell nearly 2%, or 33 cents, to $17.42 after the announcement. Cannabis stocks elsewhere were generally higher and the broader market had a strong Wednesday.