Canadian cannabis producer Canopy Growth announced on Wednesday afternoon that it would close two of its cultivation facilities in British Columbia, a move that will lead to layoffs for approximately 500 employees. In what the company is describing as a “production optimization plan,” Canopy Growth will shut down greenhouse operations in Aldergrove and Delta, British Columbia. The company, the largest cannabis firm in North America by market capitalization, also said that it would not move forward with a separate cultivation operation planned for Niagara-on-the-Lake, Ontario.
“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 wrote in a statement. “Additionally, federal regulations permitting outdoor cultivation were introduced after the company made significant investments in greenhouse production.”
Canadian Production Capacity Cut In Half
The British Columbia operations total 3 million square feet of greenhouse space, more than half of Canopy Growth’s cultivation capacity in Canada. The company said that the move was part of its plan to align supply with demand and improve efficiency over time, which will include increased reliance on less expensive outdoor cultivation. Canopy reported that it expects to take a pre-tax charge of C$700 million ($521 million) to C$800 million ($596 million) to cover the costs of closing the cultivation facilities.
“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,” said Canopy Growth CEO David Klein. “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. Along with the rest of the management team, I want to sincerely thank the members of the team affected by this decision for their work and commitment to building Canopy Growth.”
Owen Bennett and Ryan Tomkins, analysts with financial services firm Jefferies, estimated Canopy’s annual production capacity at 500,000 kilograms, compared with annual sales for the industry of about 200,000 kilograms.
“It has been clear that Canopy’s vast production space has been far in excess of what’s currently necessary,” said Bennet and Tomkins.
W. Andrew Carter, an analyst with Stifel who monitors Canopy Growth, said that he was surprised by the move.
“We believe the company carefully considered its cultivation footprint for both current and future needs,” Carter said in a note to investors. “But with 15 million square feet of licensed cultivation [in Canada] alongside the option for outdoor growing, there is limited value for indoor production particularly greenhouse cultivation.”
Canopy Growth isn’t the only cannabis company to scale back its workforce as the newly legal industry struggles to compete with an entrenched unlicensed market. Tilray, Aurora Cannabis, Flow Kana, Caliva, and others have all also announced layoffs recently. Shares in Canopy Growth were trading down 4% on Thursday.