A global survey of cannabis industry CEOs has found that more than half of the companies polled failed to meet their boards' expectations in 2022, with most also anticipating the need to raise capital in the coming year.
The EY Global Cannabis CEO Survey found that 51.5% of companies underperformed against board expectations in 2022, with executives pointing to external factors including fierce competition, pressure on prices and margins, and complex regulatory environments.
Over half of those surveyed acknowledged that their businesses would need to secure funding or financing within the next 6 to 12 months to keep operations running and support innovation, as well as mergers and acquisitions activity.
Despite ongoing financial and economic headwinds in 2023, 42% of respondents expected a high-growth scenario for the industry, forecasting growth exceeding 5% compared to 2022.
Separately, 76% said they had a clearly defined business strategy for 2023, while 94% indicated their focus was on improving margins and growing revenue. Product innovation was a priority for 67%, and 55% were targeting market expansion.
EY's Americas Cannabis Centre of Excellence carried out the global survey across December 2022 and January 2023, speaking with nearly 50 CEOs and C-suite executives from both private and public cannabis companies. Australian-based executives accounted for 9.5% of participants.
Ernst and Young partner and EY Americas Cannabis Centre of Excellence Leader Rami El-Cheikh said: "Last year was riddled with industry-specific challenges, exacerbated by inflationary pressures and limited capital availability.
"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 they'll weather the storm."
The key risks identified by executives included excessive competition (76%), sustained pricing pressure (73%), and a scarcity of capital (42%). Some 40% also anticipated a rise in competition across contract manufacturing, pheno-hunting, and large-scale, low-cost flower cultivation.
El-Cheikh added: "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."
The survey also found that 50% of cannabis executives worldwide intend to hold or cut overall capital investment in 2023, while many see potential opportunities arising from competitor exits and legalisation in new markets.
Australia, Israel, Germany, and other European nations were named as the most attractive jurisdictions, even given the current levels of regulatory uncertainty in those markets.
El-Cheikh said: "Cannabis executives have over-emphasised the importance of being strategic and cautious when it comes to mergers and acquisitions (M&A) in 2023, focusing on identifying opportunities for true synergies and profitable market share.
"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 realise rapid cost savings and revenue synergies."
EY noted that beyond this period, as cash reserves shrink and debts come due, companies plan to exhaust every available option to reach cash flow positivity, including tight cost controls and disciplined 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," added El-Cheikh.
"In this new normal, flawless operational execution and financial management should be top of mind."