Hexo Corp (TSX: HEXO) (NYSE: HEXO) announced this morning their plan to target the black market on a price per gram basis, starting a long anticipated pricing war within the cannabis space. The firm announced this morning that it will begin selling 28 gram, or 1 oz equivalent, packs of cannabis at $125.70, a figure that equates to roughly $4.49 per gram.
The pricing strategy is interesting, as that figure includes all required taxes and excise fees, resulting in a very low margin product for the producer. Hexo last quarter recorded an average sale price per gram of $5.29 for adult-use cannabis, with net revenues coming in at $4.30 per gram. At face value, this new strategy appears to result in only a marginal decrease in revenue. However, that figure does not include taxes, excise fees, or the share of the sale that is allocated to the retailer.
Within Hexo’s latest MD&A, the firm identifies that the margin per gram is roughly 50% based on net revenues and cost of sales. This implies that the firm is running at roughly $2.17 per gram for a cost basis – leaving little room for margin when this new product is expected to retail at $4.49 a gram, taxes in.
Our aim with Original Stash is to disrupt the illicit market, educate consumers about the value of a regulated and tested product, and drive them to purchase their cannabis legally. We’re now competing directly with the illicit market and providing consumers with an affordable, controlled, quality product. Moreover, we are giving consumers the option of less packaging in a 1 oz format, which we know is a priority for so many.
Sebastien St-Louis, HEXO Corp’s CEO and co-founder
The new product, under the Original Stash brand name, is expected to hit stores in Quebec this Thursday. Roll out to other provinces is expected in the near term, although specific province-by-province availability was not provided by the firm.
The announcement from Hexo Corp comes on the heels of cancelled guidance from the issuer, who no longer anticipates revenues in excess of $400 million for 2020. The firm also missed guidance for the fourth quarter, with preliminary revenues of $14.5 million. The lackluster sales has been blamed largely on poor provincial roll-out of retail operations, as well early signs of pricing pressure. Evidently, the pricing pressure relates to that of the black market as well as competitors, with the firm now aiming to tackle the issue head-on with today’s announcement.
Hexo Corp closed yesterday’s session at $2.56 on the New York Stock Exchange.
Information for this briefing was found via Sedar and Hexo Corp. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
