Boom and Bust in Canada’s Legal Weed Market

Part 1: Industry leaders predicted a $500 billion market for legal cannabis. They were spectacularly wrong.

Canada’s legal cannabis boom created a new class of millionaires overnight.

Master growers who’d spent their adult lives as outlaws were suddenly flush with cash and stock in the hottest companies on Wall Street.

How many among them got their start in the fields, digging ditches and swatting horse flies under the August sun? And what of the indoor growers who had to hide in plain sight, nursing hundreds of plants from seed to stem as they outfoxed the cops? 

Well they didn’t have to hide anymore. 

Now, as Ottawa set the table for legalization, master growers — the do-it-yourself botanists who created many of the strains sold on today’s legal market — were indispensable. Licensed producers drew the growers in with six-figure salaries and stock options worth millions. For those who knew them from the black market days, it was strange to suddenly see their old comrades riding around in Lamborghinis and buying up real estate.

And why wouldn’t they flaunt their wealth?

They busted their ass for years under prohibition, risking it all to perfect a drug that would be used to treat cancer and epilepsy. Many of them served time in prison or fought drug trafficking charges all the way to the Supreme Court, paving the way for legalization. 

Now, with a stroke of a pen, the very thing that made them criminals was being touted as the new frontier of capitalism. Some of the world’s biggest investment firms poured billions buying up land and retrofitting farms throughout Canada, eager to stake their claim in the green rush. 

The hype would be short lived.

Just months after the Liberal government passed the Cannabis Act in 2018 — legalizing the sale of recreational weed across Canada — the industry started to crumble. Companies like Aurora, Tilray and Canopy Growth flooded the market with so much cannabis that, by 2021, over 1 million kilos of Canadian bud went unsold. Suddenly, the same CEOs who promised investors billions in profits were now laying off workers by the hundreds and selling assets at a loss to keep the creditors away.

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“Everybody just kept expanding and building and trying to buy up more of a market that didn’t even exist yet,” said one former cannabis executive, who did not want their name published. “The valuations were not tethered to reality but investors kept pouring money in because they were afraid of missing out.

“Everybody was being led by their own greed rather than any sort of logic. It could have been so beautiful but we fucked it up.”

The Liberal government that legalized cannabis sold Canadians on a market that would generate billions in tax revenue, create thousands of well-paid jobs and deal a deathblow to the gangsters who profited off the black market.

Now, nearly five years after cannabis was legalized, roughly one third of the industry’s 20,000 jobs have disappeared and the black market might be stronger than ever.

This is a two-part story about Canada’s cannabis crash, the people ruined by it, and those still forging ahead.

***

On the eve of legalization, Bruce Linton was untouchable.

You could argue that Canada’s recreational market, as we know it today, wouldn’t have happened without the man who co-founded Canopy Growth.

When he launched Canopy, in 2012, the federal government hadn’t even started licensing companies to grow medical marijuana. The only options for patients was to either get a federal license to grow their own — not ideal for people struggling with a terminal illness — or risk arrest by buying it off a “compassion club” dispensary.

But years of activism and court challenges forced the federal government to modernize its medical cannabis program. By 2013, the government launched the Marihuana for Medical Purposes Regulations program, licensing companies to grow cannabis under the supervision of Health Canada.

It seems obvious now that a legalized recreational market would eventually take hold in Canada and across the world. But back then — under the law-and-order Conservatives — it was still just a pipe dream. 

So when Linton engineered a 2014 deal that would see shares in Canopy Growth traded on the Toronto Stock Exchange, it showed vision, guts and proved to be a quantum leap towards legalization.

Sure, the company’s stock was going for less than $3 a share but there they were, being bought and sold on the same trading floor as the Canadian National Railway and Imperial Oil. Linton got his big break in 2015, when the federal Liberals took power with an agenda that included legalizing cannabis. 

It took years of consultations and backroom politics — the government’s weed legislation stalled in the Conservative-controlled Senate for months — but eventually the feds set a date for legalization: Oct. 17, 2018. As that date approached, Canopy’s stock rocketed to nearly $70 a share.

Of course, Canopy Growth hadn’t posted a profitable quarter in six years and they were burning through mountains of cash but that didn’t seem to matter. His company was primed to be the biggest player in a market that could prove to be the next tech. That might explain why Canopy was valued at $15 billion before selling so much as a gram of retail weed.

In an interview on CNBC’s Mad Money, Linton was asked how big he thought the legal market would become.

“The conservative, cautious people are saying $200 billion,” he said. “I think the ones that are closer to accurate say it’s probably $500 billion. Because we disrupt alcohol, potentially, cigarettes — in terms of smoking cessation — potentially and pharmaceuticals. Because whether you’re a geriatric patient suffering from arthritis, you’re going through cancer treatment or you’re someone who can’t sleep, I think you’re gonna find cannabinoid therapy is really a hit.”

Despite Linton’s bullishness, there were early signs that legalization, though imminent, was going to take years for Canada to get right. 

Some provinces, like Quebec, added layers of bureaucracy to the process, slapping on additional cannabis regulations, raising the minimum smoking age to 21 and limiting the points of sale to government-run shops. 

There would also be significant limitations on how producers could market their product. Years earlier, Canopy had spent a fortune partnering with the rapper Snoop Dogg to distribute his brand of bud. But under the Cannabis Act, it was illegal to use Snoop’s celebrity or any advertisement “that includes glamour, recreation, excitement, vitality, risk or daring” to sell weed.

Meanwhile, in Ontario, rather than limit the point of sale to state-run shops, the Progressive Conservative government was set to award over 1,000 licenses to dispensary owners across the province. But the lottery system it would use to dole out these licenses delayed the rollout of legal weed in Canada’s biggest market.

It would be an extra six months, post legalization, for the first shops to open up in Ontario. Meanwhile, Canopy continued burning through cash to acquire more market share. A month before the CNBC interview, Linton closed a $600 million deal to acquire Hiku, paying the American cannabis company a 33 per cent premium on its share price to sweeten the pot. 

The shopping spree had only just begun. 

Two days after the Mad Money appearance, Canopy announced its acquisition of a Colorado-based hemp manufacturer for $25 million cash and up to $100 million in shares. The ink was barely dry on that deal when Linton’s team put together a $220 million offer to buy a vape manufacturer in Tuttlingen, Germany.

Eventually, the bills would come due. Eventually, Canopy would have to start earning more than it was burning. And yet, Linton seemed to face little skepticism from the markets. Maybe it was the way he carried himself, borrowing the lingo of a tech guru as he spoke of “disrupting” his way to a half trillion dollars. 

Two sources close to Linton say he wasn’t what you’d imagine in a tech investor turned millionaire CEO. 

For one thing, he didn’t flash his cash. His demeanour was far more self-effacing than braggadocious and he had a boundless energy going back to his days at Carleton University in Ottawa. Back then, in the early 1990s, he was elected student union president and served on the school’s board of governors while supporting himself with odd jobs.

“It took me six years to do a four-year degree at Carleton,” he said, in a 2018 interview. “And that’s because there was nothing I didn’t do at Carleton. My parents would say, ‘Well, are you graduating this year?’”

By the time he co-founded Canopy Growth in 2012, Linton was independently wealthy with 20 years of executive experience in the finance and tech sectors. But where many of his risk-averse peers saw the cannabis sector as a minefield — banks wouldn’t even let licensed cannabis companies park their cash in an account back then — Linton saw an opportunity. 

He became the ultimate middleman, bridging the gap between the outlaw farmers and Bay Street money types, creating a roadmap for future entrepreneurs.

At the height of his success, Linton was named 2018’s CEO of the year by the Ottawa Business Journal, which pointed to his record as a “trendsetter and disruptor” who shaped “an entire industry.”

Linton was fired from Canopy Growth seven months later.

***

When the Liberal government took power on a promise to legalize recreational cannabis in 2015, it marked the beginning of an arms race.

Producers who’d been licensed to grow medicinal cannabis already had the basic infrastructure to grow and ship weed. All they needed was scale.

Backed by deep-pocketed investors, firms like Canopy pressed ahead with an aggressive expansion campaign. To edge out their competitors, the company bought up farms in Southern Ontario, Quebec and British Columbia.

Not to be outdone, the Alberta-based Aurora Cannabis spent $100 million creating the world’s biggest grow operation in Edmonton. The facility, Aurora Sky, could grow upwards of 100,000 kilos of weed each year. By 2019, Aurora’s labs had the capacity to harvest 625,000 kilos of weed annually. That’s one company, producing double what Canadians consume each year on the legal market.

As Aurora jockeyed to the front of the market, its competitor Aphria doubled annual production to 255,000 kilos in late 2019.

Meanwhile, even though smokers accounted for over 70 per cent of the market, companies spent a fortune trying to find a new market for cannabis. There would be oils, tinctures, beverages and even pills. 

CBD — a non-psychoactive cannabinoid that works as an anti-inflammatory — became the go-to for every ailment under the sun. There were CBD capsules for arthritis, CBD oils for insomnia and even CBD-infused lubricants to enhance sexual pleasure.

All of the big firms bled money but they kept scaling. It was only a matter of time, logic dictated, before their competitors would go out of business and they’d have the market all to themselves.

“We were growing enough weed to supply the whole world,” said one master grower, who still works for a major cannabis company. “My job was to shut the fuck up and produce on a scale none of us had ever seen. No one, on the business side, stopped to think whether we were overextending ourselves.

“It seems pretty obvious in hindsight.”

***

Less than five years after construction began on the world’s biggest grow op, Aurora cut production at its Sky facility by 75 per cent.

But no amount of belt-tightening could sustain them through quarter after quarter of losses. In January, Aurora announced it would be selling off its Sky farm for just $15 million — incurring a massive loss.

Just as news of the Aurora fire sale surfaced, Canopy announced it would close its flagship plant in Smiths Falls, Ont. and lay off some 800 workers. Canopy had rode into town on a white horse, repurposing an abandoned Hershey’s chocolate factory that once employed hundreds of locals before being shuttered and offshored in 2007.

Now, it seemed, history was repeating itself.

“These weren’t just numbers on a ledger, they were people who banked their futures on the industry,” said a former factory worker. “People at the top seem to forget that.”

One former cannabis executive said the game changed when control of the industry was wrested from the growers whose expertise made legalization a possibility.

“Companies weren’t being led by cannabis people anymore, it was all tech bros, finance guys, stock promoters, lawyers with connections to the Liberal and Conservative parties,” the executive said. “It was no longer about the customer, it was about sinking the other guys by dying slower than them.”

In the early days of legalization, “funded capacity” became the buzzword used to attract new investors or entice existing ones to inject more cash into buying vegetable farms and retrofitting them for cannabis.

“It was a fucken money pit,” the executive said. “We were partnering with farmers who’d never grown weed in their lives and king-making them because we needed to show investors we weren’t working with criminals. But pot isn’t corn, pot isn’t tomatoes, you wouldn’t hire a master grower to run a dairy farm so why would it work the other way around?

“There were companies putting their trust in botanists who, though they had a PhD from a major university, didn’t know a thing about growing weed.”

Even as reality set in — Canada’s $1.2 billion worth of legal sales in 2019 was roughly a quarter of what government studies projected — licensed producers kept expanding. As growth stalled, companies started to stockpile unsold weed by the tonne, culminating in some 1.1 billion grams of cannabis gone to waste in 2021. 

Compounding these troubles, provincial governments were beset by distribution problems from the get-go. Quebec ran out of supply almost immediately after opening its first government-run dispensaries in 2018. The province’s first 12 dispensaries, called SQDCs, could only open four days a week because of supply chain issues. While this might seem like a good thing, it created an opening on the “grey” market.

Just outside Montreal, in the Mohawk territory of Kanesatake, Clifton Nicholas was just one of dozens of Indigenous entrepreneurs who felt left out by the legal market. Just a few kilometres from the rez, Canopy had bought a massive tomato farm in the middle of Kanesatake’s land claim and they’d spent a fortune turning it into a grow op.

“Here was this new, innovative, woke business getting rich on stolen land while some of us live in shacks,” Nicholas said. “We didn’t have access to lobbyists and big money but now that the Trudeau government was going ahead with legalization, I saw an opportunity.

“Because under the UN Declaration of the Rights of Indigenous People — which Canada signed on to — I have the right to an economy within the laws of this country. And when cannabis became legal in Canada, I was within my rights to sell cannabis responsibly. So I did.”

Nicholas’ dispensary was the first of dozens that would sprout across the territory, enticing customers with more product at a cheaper price, no supply chain issues and flexible hours.

“There’s no doubt we’re taking a big bite out of the SQDC’s sales,” said Nicholas, whose Green Devil dispensary sponsors youth sports and other local initiatives. “There might have been room for some licensing and regulation on our territory but we were never involved in that conversation. Instead, you had people in the industry and their friends in the government trying to tell Indians what they could do on their own land.” 

Unbound by sales tax and marketing regulations, Kanesatake’s shops lit up Highway 344 with neon signs advertising $80 ounces of weed, a variety of edibles and free joints with bulk purchases.

Most, like Nicholas, ran their shops as a family business that poured profits back into the community and sourced their weed from Indigenous growers across the country. They spoke of developing an ethical economy that could sponsor Indigenous language programs, fund legitimate businesses and give their kids a better future.

But other entrepreneurs weren’t so scrupulous. 

One dispensary would regularly have Hells Angels parked outside on their motorcycles, flashing their colours in a way that hadn’t been seen since the biker wars of the 1990s. Another, the Green Room, sold beer and hosted parties that saw white kids from across the region flock to Mohawk territory for a bit of extralegal fun.

Things came to a head when a Montreal gangster was shot dead outside the Green Room on Canada Day 2021. Witnesses say the gunman walked up to his victim and shot him in the back of the head, execution style. To cap off the gangland hit, the shooter escaped in a stolen car, ditched it in a nearby farmer’s field and set the vehicle on fire.

Though the community came down hard on the Green Room’s owners, the damage was already done.

***

As Canada’s legal market continued performing far below expectations, the world’s biggest pot firms merged to survive the crash.

First, the American company Tilray swallowed Aphria to become the largest weed grower in the world. But despite cutting costs through layoffs and plant closures, profits never materialized. This month, not two years after the merger, Tilray took on more debt to buy Quebec-based HEXO, a move stock analysts panned as “more of the same” and “deeply unprofitable.”

“They didn’t understand weed, they didn’t understand the culture, they just wanted to jockey their stock prices ahead of their competitors,” the cannabis executive said. “We might have been okay had the weed been good on Day 1 of legalization. But it sucked.”

To cut corners, companies like Canopy ignored the advice of veteran growers who insisted they should hang dry their cannabis plants before trimming them. Though the practice was labour intensive and took an enormous amount of space, it was the industry standard on the black market.

Instead, their automated process put moist plants through a thresher, draining them of the flavour that so many smokers had come to enjoy. The final product was dry and tasted like dead grass.

Those who ventured into the American market found a whole new frontier of regulatory issues hampering their growth. Though the sale of cannabis is legal in 21 states, a federal ban on interstate sales remains in place. States like Oregon and Washinton, which legalized sales in 2015 and 2012 respectively, produce far more cannabis than can be locally-consumed — prompting what regulators have described as “an existential crisis” for the industry.

There are reports of licensed producers funneling their product back onto the black market so they can stay afloat, according to an investigation by Fortune magazine. 

“I still think the industry will get through this and that there’s something good on the other side of all this pain,” said the former cannabis executive. “There’s more research on cannabis now than ever before and it’ll never cease to amaze me that you can walk into a store and buy it. That blows my mind, given everything we went through before legalization.

“But years from now, we’re going to look back at this and shake our heads. We didn’t have to make it so hard on ourselves.”