58% of cannabis companies didn't meet board expectations in 2022, finds EY survey

76% of cannabis executives claim to have a well-defined business strategy this year

• Over half of companies in the cannabis industry will require funding in the next 6-12 months
• More than 50% of global executives plan to maintain or reduce overall capital investment
• Excessive competition, ongoing pricing pressure and scarcity of capital are top risks to growth

TORONTO, April 17, 2023 /CNW/ - The EY Global Cannabis CEO Survey reveals that over half of cannabis companies underperformed relative to their board's expectations in 2022, given the lasting impact of externals forces such as intense competition, price and margin pressures and complex regulations. Despite the adverse challenges, 76% of executives claim to have a well-defined business strategy for 2023 and are focusing on margin enhancement and revenue growth (94%), product innovation (67%) and market expansion (55%) as top strategic priorities.

"Last year was riddled with industry-specific challenges, exacerbated by inflationary pressures and limited capital availability," explains Rami El-Cheikh, EY Americas Cannabis Centre of Excellence Leader. "Although cannabis executives are anticipating another wave of intense hurdles with persistent inflation, ongoing competition, pricing compression and margin pressure, companies that have established strong foundations are confident that they'll weather the storm."

Tightening business strategies amid increased competition
 
As the industry continues to change at a relentless pace, the risks facing organizations continue to grow with excessive competition (76%), ongoing pricing pressure (73%) and scarcity of capital (42%), emerging as primary concerns. Further, 40% of cannabis executives anticipate that competition will increase in the areas of contract manufacturing, pheno-hunting and low-cost, large-scale flower cultivation.

Despite the high level of external financial and economic uncertainty in 2023, 42% of cannabis executives are still predicting a high-growth economic scenario for the industry, with growth projections exceeding 5% over 2022.

"The sector is facing a major reset in 2023 – to survive, cannabis companies will have to sharpen and focus their business strategy with clear fields of play where their capabilities can deliver an advantage and a distinct consumer-centric value proposition," suggests El-Cheikh.

Changing perspectives on mergers and acquisitions (M&A)

The survey finds 50% of global cannabis executives plan to maintain or reduce overall capital investment in 2023 and many anticipate potential opportunities from competitor exits and legalization in new markets, with Germany, Israel, Australia and other European countries cited as the most attractive jurisdictions despite current uncertainty.

"Cannabis executives have over-emphasized the importance of being strategic and cautious when it comes to M&A in 2023, focusing on identifying opportunities for true synergies and profitable market share," says El-Cheikh. "But in today's tough environment, M&A activity should only be considered in select cases where companies have built a strong enough foundation to confidently realize rapid cost savings and revenue synergies."

More than half of executives recognize that their companies will require funding or financing over the next 6-12 months to sustain operations and fund innovation and M&A initiatives. Beyond this time frame, as cash dwindles and debt becomes payable, companies will exploit every lever possible to attempt to achieve cash flow positivity, including tight cost controls and stringent working capital management.

"The year ahead will force many companies to either exit the industry or become exceptional operators, executing efficiently with resolve, grit and a value-oriented mindset," adds El-Cheikh. "In this new normal, flawless operational execution and financial management should be top of mind."

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This news release has been issued by Ernst & Young LLP

About the survey

The EY Americas Cannabis Centre of Excellence launched its first Global Cannabis CEO Survey to understand how cannabis companies are faring and tackling the opportunities and threats that they face. From December 2022 to January 2023, almost 50 private and public cannabis company CEOs and C-suite executives were interviewed across North America, South America, Europe and Australia.

SOURCE EY (Ernst & Young)

Dina Elshurafa, [email protected], 519 697 2694