- Canopy Growth is closing two cultivation facilities and laying off approximately 500 employees, according to a company release. The greenhouses are located in Aldergrove and Delta, British Columbia.
- The company also canceled plans to open a greenhouse in Ontario. Canopy Growth said its outdoor cultivation site is more cost effective than the greenhouses.
The site closures are expected to result in a CA$700 million to CA$800 million ($522 million to $596 million) pre-tax charge on Canopy Growth's earnings in the quarter that will end on March 31. The company said it will also likely incur other charges from its organizational and strategic review.
As Canopy Growth continues to struggle financially, it is turning to drastic cost-saving measures. About 17 months after the creation of the legal adult-use market in Canada, the world's largest cannabis company said that the recreational market "has developed slower than anticipated, creating working capital and profitability challenges across the industry."
Since its expectations for the industry aren't paying off as planned, Canopy is rethinking its strategy and consolidating its production. Canopy has been a first-mover in the market for a while and that seems to have caused some issues for them.
Federal regulations in Canada allowing outdoor cultivation were introduced after Canopy Growth made a huge investment in greenhouse production, the company said. Since outdoor cultivation is more affordable, this move could help reduce costs in the long run. But for now, the loss of its two greenhouses will be a big hit to the company. Each span about 3 million square feet of licensed production space, and together currently account for more than half of Canopy Growth's cultivation operations in Canada.
Although cannabis food and beverage products just started to hit shelves in December, Canada legalized recreational marijuana nationwide at the end of 2018. In the first full year of marijuana legalization, domestic beer volumes in Canada fell 3.9% compared to 2018 largely because more people were smoking, according to Beer Canada. But that hasn't been enough growth to help Canopy.
The cannabis company also planned to capitalize on the new cannabis-infused food and beverage market in Canada, but that hasn't panned out either. The beverage line that Canopy Growth planned to release in January was delayed. The company said it had not finished scaling up its cannabis beverage production facility in Smiths Falls, Ontario for commercial production and would not launch its products as previously announced. The news of Canopy's delay came the day after the government-run Ontario Cannabis Store opened and sold out of all available edibles and beverages — a major missed sales opportunity. And now these greenhouse closures will likely slow production even more.
The bad news seems to keep rolling in for Canopy Growth as it continues to face obstacles that have diminished its chances of meeting the once high expectations for the company. The need to close these greenhouses is likely another hit to Constellation Brands as well, which invested nearly $4 billion in the cannabis company in 2018 and had high expectations at the time. But since then, Canopy has weighed down Constellation's earnings and the alcohol giant disclosed a loss of $484.4 million on its Canopy Growth investment in October.
As a result, Constellation recently heightened its oversight of Canopy by appointing one of its own employees as CEO. Last year, Bruce Linton, former co-CEO and a board member of Canopy Growth, was fired and in December, Canopy Growth named David Klein, Constellation's CFO, as the cannabis company's next CEO. Klein knows he needs to deliver better results, and immediately cutting down its costs and production seems to be his first step.
"When I joined Canopy Growth earlier this year, I committed to focusing the business and aligning its resources to meet the needs of our consumers," Klein said in the release. "Today’s decision moves us in this direction, and 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."
Closing facilities and consolidating is a common practice to save money in the food industry. Many food and beverage companies have been forced to cut manufacturing jobs and close plants to help boost revenue. Companies like TreeHouse, Dean Foods, Coca Cola, General Mills and PepsiCo have all slashed jobs and shut down facilities in recent years in hopes of raising profits.
As Canopy takes yet another hit financially as the company completes its organizational and strategic review, Constellation is likely growing increasingly concerned that its big bet on cannabis may never pay off as originally expected.