The repercussions of Canopy Growth Corp. eliminating 500 members of its workforce are being felt by pot stock investors and traders; on Thursday, March 5, shares sunk by four percent. Canopy’s plummeting shares were to be expected, considering the fact that the Canadian cannabis company recently announced its plans to close two greenhouses and delay plans for the launch of another cultivation facility.

Oversupply is a concern among cannabis producers like Canopy; a lack of retail outlets has made it tricky for licensed producers to distribute products among consumers. As a direct effect of this, the black market is continuously flourishing. Currently, annual industry sales are estimated to be around 200,000 kilograms. However, Canopy’s cultivation facilities are capable of churning out 500,000 kg on an annual basis, meaning that the company’s return on investment (ROI) isn’t as healthy as it could be.

“It has been clear that Canopy’s vast production space has been far in excess of what’s currently necessary,” say analysts for Jefferies – a diversified financial services company – Owen Bennett and Ryan Tomkins. Closure of Canopy’s greenhouses means that the company must now fork out pre-tax charges; $700 million CAD ($521 million USD) to C$800 million ($596 million). 

Cannabis company layoffs pose a threat to Canopy’s investors, signify industry instability

Approximately 500 jobs will be slashed as a direct effect of the closures of Canopy’s cannabis greenhouses. According to the Ontario-based company, these job losses are required as part of an “organizational and strategic review” that will “align the company’s cultivation capacity with projected demand.” The greenhouses that Canopy intends on closing are located in the Aldergrove and Delta communities of British Columbia. Stretching over a combined space of three million square feet, these licensed cannabis cultivation facilities initially launched for operation in 2018. 

Canopy – which has attributed the closures to “slower than anticipated” growth of the cannabis industry – is one of many Canadian and U.S. companies that are downsizing as of late. Aurora Cannabis Inc. announced in February of this year that it would be letting go of 500 employees; Hexo just laid off 200 employees; CannTrust laid off 180 workers in September 2018; Pax Labs laid off 36 employees in October 2018; Weedmaps laid off over 100 employees in September 2018.

Canopy looks set to recover from cannabis company layoffs with help from new chief executive

Fortunately for Canopy, outdoor cannabis cultivation is a desirable back-up option. This type of cultivation is more economically-friendly than indoor facilities, which rely on high-intensity lighting and climate control. Not only this, but outdoor cultivation is less costly; particularly so in regions that are blessed with pristine growing conditions. On that note, while laying off 500 employees isn’t ideal for those who stand to lose their jobs, it means that Canopy can now focus on turning over a healthy profit.

Jefferies analysts say that, since the news of Canopy’s job cuts have emerged amidst the presence of new Chief Executive David Klein, the move confirms that he “is serious about instilling the financial rigor that many have been hoping for.” Klein was the former chief financial officer for Corona beer producer Constellation Brands. In August 2018, the beer brewer announced its $4 billion stake in Canopy; an investment that boosted Constellation’s stake from 9.9 percent to 38 percent.