The cannabis sector has entered bearish territory, with a weak earnings season raising doubts about the industry’s future. Most companies missed analysts’ expectations, disappointing participants across the board. However, perhaps even more concerning was management’s guidance on the industry’s outlook.

Cannabis industry’s failure

The Canadian market is the largest federally legalized marijuana market. However, even a year after legalization, acceptance has been slower than anticipated. Canada is unique, with limited markets for the industry to capitalize on. Ontario is one such market, based on its population—the province is home to about 39% of Canada’s total population. And the second-strongest market, Québec, accounts for about 22% of Canada’s population. Naturally, marijuana industry players tend to focus on these markets.

Cannabis retail takes a turn

One main reason cannabis companies have failed to deliver is the retail scenario in Ontario. The slow rollout of retail licenses has impacted retail market expectations, which were based on earnings forecasts. Organigram (OGI) and Cronos Group (CRON) which both reported their earnings this month have experienced a weak revenue growth due to slow retail rollout. Why did analysts get their estimates wrong?

Last year, the province of Ontario elected Doug Ford as its new premier. Ford, who represents the Progressive Conservative Party, overturned the Ontario Liberal Party’s incumbent, Kathleen Wynne. Subsequently, the new government moved to undo what the previous government had planned.

One plan overturned was cannabis retail stores’ rollout. Under the Liberals, cannabis was to be retailed under the provincial government’s Crown corporation. However, as the Ford administration believed it was a lot for the government to oversee, it allowed private players to set up and run cannabis stores.

The slow rollout

The government opted to grant licenses to private players through a lottery system. But that choice did not quicken the process, with some lottery winners even being disqualified. Now, after reflecting on its missteps, the government has announced it will scrap the lottery system altogether.

Social engagement

Whether scrapping the lottery system revives cannabis companies remains to be seen. The bigger area of improvement I’d like to see is people getting excited about cannabis. The cannabis industry shares many parallels with the alcohol industry. Whereas you’ll often see people socializing over drinks, that culture hasn’t caught on with marijuana.

We don’t often see cannabis discussed freely on social media platforms, either. Could Cannabis 2.0 change how people talk about marijuana? Similarly, when cannabis beverages and other formats roll out, will people talk about them more? The resulting social engagement could drive demand and companies’ earnings.

Authored by: Adam Jones, Market Realist