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Hexo’s move underscores the pressure Canada’s legal cannabis producers are under to take bold action as they attempt to boost sales and wrench more market share from illicit dealers.

CHRIS WATTIE/Reuters

Hexo Corp. is launching low-price bulk cannabis in a bid to kickstart sluggish sales and undercut the black market, a week after the company triggered a broad sector sell-off with a warning about its poor revenue outlook.

Hexo, based in Gatineau, said it will sell one-ounce packages of cannabis for the equivalent of $4.49 a gram, less than half the average legal retail per-gram price in Canada, and well below average black-market prices.

The company’s move underscores the pressure Canada’s legal cannabis producers are under to take bold action as they attempt to boost sales and wrench more market share from illicit dealers. By some estimates, the black market collectively controls at least three-quarters of the industry’s overall sales. High prices and quality issues have weighed on cannabis sales by licensed producers and retailers a year after marijuana was made legal in Canada.

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Retail prices for legal cannabis average more than $10 a gram, and black-market prices average around $5.60 a gram, according to Statistics Canada.

“We’re now competing directly with the illicit market and providing consumers with an affordable, controlled, quality product," Hexo chief executive and co-founder Sebastien St-Louis said in a statement. “The one-ounce package allows us to drop the price substantially,” he added in an interview.

Hexo’s Original Stash will sell for $125.70 (including sales taxes) in Quebec starting this week. Sales will roll out in the rest of Canada “soon,” the company said.

But some industry insiders and analysts say the high total cost for the 28-gram package could be a tough sell for consumers already conditioned to purchase small quantities.

“With our customers right now, we’d be a little nervous about having that in inventory. Something that expensive I think would be difficult to sell," said James Burns, CEO of Alcanna Inc., which owns Nova Cannabis retail stores in Alberta. "From Nova’s point of view, I don’t think we’d be in a hurry to buy very much, if any.

“Right now, the demand, I would think it’s going to be soft. Anything large is hard to sell.”

The package size in most demand for dried flower is one gram, while the largest available items at seven grams have so far proven difficult to sell, Mr. Burns said. “It will be an interesting experiment. They’ll have a tough time I think, but I applaud the effort.”

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Hexo’s product launch came a week after the company said it expected fourth-quarter sales to be much lower than previously estimated and withdrew its 2020 revenue forecast, sending the company’s shares plummeting and sparking a sector sell-off.

Mr. St-Louis said then that he blamed the bleak sales forecast on a number of macro headwinds, including slower-than-expected store rollouts, early signs of pricing pressure and a delay in government approval for cannabis-derivative products.

This came days after Hexo’s chief financial officer resigned after taking on the role in May.

Original Stash’s levels of tetrahydrocannabinol (THC), the cannabinoid that causes the high that pot is known for, range from 12 per cent to 18 per cent. The latter figure represents high THC levels, which is in strong demand in a legal market that is flooded with pot containing low to moderate levels of THC.

Hexo said Original Stash is aimed at disrupting the illicit market, educating consumers about the value of a regulated product and driving them to buy legal cannabis.

The company aims to soon expand sales to Ontario and Alberta, although Mr. St-Louis did not provide details on the expected wholesale prices in those provinces.

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Jefferies Equity Research said in a report Wednesday that while Hexo’s new brand is about 50 per cent below the average retail price, it is 20 per cent below the average price on the illicit market.

“While a move to improve market share after pulling away from [full year] 2020 guidance, we question how successful it will be given current legal demand is for higher quality and the $125 price is not consistent with illicit purchasing habits,” Jefferies said.

Jefferies did not see this as a precursor to industry-wide price compression, which it believes will be isolated to low-quality products and oil.

“Today’s announcement looks to be an aggressive move to address limited demand for Hexo and increase market share,” Jefferies said, pointing to Organigram Holdings’ Trailblazer brand and average black-market prices that are both at $5.59 a gram.

RBC Dominion Securities said in a report that it viewed the “value brand” launch as neutral to slightly positive for investors, pointing to pricing as the biggest factor keeping customers that buy illicit cannabis from migrating into the legal market. RBC, however, said it was cautious as it needed to see signs of “sustained sell-through” of the product.

“Finally, we note the risk of margin pressure with $4.49/gram of retail pricing, compared to the $4.30/gram average selling price to the provinces in the company’s FQ3/19 results,” RBC said.

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“The news also supports our view that the industry is likely to face pricing pressure as a result of significant oversupply towards the end of the year.”

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