An Aerial View of Canadian Cannabis
By Brian Wagner, CEO
Cannabis Compliance Inc.
It’s been a while since I last blogged about the industry; time for a fresh perspective. There’s certainly a lot of chatter around who’s doing what – especially in the Twitterverse – but CCI has a unique vantage point: we [humbly] participate in many LP strategic meetings, submit application after application for budding entrepreneurs, and engage government agencies at different levels (listening and advising). I’m often asked what I think of the industry and where it’s headed, and for those who care, here’s some of my thoughts. Just don’t ask me for stock tips.
2018 has certainly been a year of heating up. Lots of large acquisition, some fallings-out, chatter about Germany, and people Googling where Zimbabwe is. We saw institutional investors sink some credibility into the industry as well. There seems to be a lot of nervousness around the fate of the cannabis industry after a few years, which I guess is not surprising; I believe it’s the result of targeted marketing from those who stand to gain with less competition. So where are we headed?
The industry is still young. Very young. Of course, there has never been an industry that opened up overnight with demand already in place. So there’s that. But the industry is still fledgling and trying to understand what it is – a bit of an identity crisis. Right now there’s the sense that producers have keep burning the midnight oil to take full advantage of the “pending” legalization this summer. Full steam ahead, burning cash in their engines just to make it up the hill. I understand the reasoning, but I believe the panic is a little misguided. (I have a healthy respect for those producers who have no intention of going public and are focusing on building a small, sustainable, profitable business.)
Even if legalization technically happens before the Fall, it won’t matter if the feds succeed in squeezing their bill through the Senate unscathed; the provinces aren’t nearly ready. Even in Alberta where we’ve filed hundreds of retail applications, where private entities can go as fast as they want – their shelves will barely have been built to store the product. And of course there’s the looming supply shortage that analysts are predicting. Personally, I don’t think there will be a supply shortage; I think there will be a “re-supply” shortage: after the initial spending spree by consumers giddy to buy legal weed, the shelves will be empty and the plantlings too small to harvest. So there’s that.
Another frantic rumour is that only a couple of the big producers will succeed in winning market share after a year or two. Don’t believe a word of it. There will be some obvious winners in provinces like Quebec who may close the supplier door for a few years; but then again they will have so few stores where you can buy the product, it might not even matter. I think the chances of quelling the black market in provinces like Quebec and Ontario are low, at least until they let the private retailers in. But could a couple of large producers with many millions of square feet really crush out the small players? Won’t we see a “craft movement” in cannabis usurp the larger corporations? After all, I also hear a lot of bad-mouthing around the large producers’ flower being [insert bad word].
My point is, that Canada plunged the cannabis industry into a capitalist market, which means there are competing groups using scare tactics to gain an advantage. The small guys are casting shadow on the big guys; the big guys are buying the smaller guys. And through it all, the person left behind is really just the consumer. Whatever the gossip within the businesses of the industry, the consumer is pretty much on the outside. At least until physical retail opens up. Then consumers will be talking (and tweeting), and then we start to learn what consumers actually respond to.
So who’s going to win the producer war? I read with great interest the article by BMO on its outlook on the industry. I’ve been a big fan of BMO for many years, not just because they’re out bank and advisor, but historically they were a risk-taker – it’s what pushed them to where they are today. Their analysis points out many challenges that producers face in winning this war. It certainly suggests that there will be a handful of winners, and a multitude of losers. It could be. But I think we have to pause and reflect on what we know, and what we don’t know.
First, we don’t know what consumers are going to respond to – with regards to marketing (limited), branding (limited), perceptions around company culture, strains, dosage forms, packaging, etc. It’s a new market. In a sense, the ACMPR mail-order system was only a precursor to the “real” consumer market which is only now opening up. It will be fascinating to learn in the years ahead what consumers actually care about. And I don’t think anyone (not even me) has a crystal ball on what that looks like. We’re all taking educated guesses.
But this is where entrepreneurs shine – finding opportunities that no one else sees. I remember four years ago when the ACMPR was still new, talking to entrepreneurs about what I thought was a massive opportunity to get in on the ground floor. Many walked away shaking their heads; some saw the light and took a chance. Of the latter, we have some very sophisticated producer clients now who are smiling ear to ear. I feel the industry will still have the entrepreneur advantage for many years to come – for those who pay attention to the industry as it shifts, they will find a niche market and launch their business.
Of course, at the same time, we also see a lot of companies wanting to just build a facility, create some noise, do a reverse take over, and liquidate their stocks. With no experience in cannabis, no intuition on what consumers are wanting, and no experience managing (or growing) a business in the consumer products world. There is always room for luck, but I think these kinds of companies will have a hard road ahead. They’ll wake up one morning with a cultivation licence, and then have to decide how to run a business – and grow some great flower. (Usually their “master grower” claims to grow five pounds per light.)
I think we have to reflect on where the market was four years ago compared to where it is today. In the beginning, there were only a dozen producers who were lucky enough to achieve a cultivation licence, before the Harper government started slowing down the approvals. Achieving a licence was like winning the lottery. It boosted their valuations and allowed them to trade high. They could gain traction simply by showing up. But today it’s a different story – the politics and government are very different. The Office of Medical Cannabis at Health Canada is extremely friendly to work with, and they’re ready to deploy hundreds of LP licences in the year ahead. Achieving an LP is no longer an impossible feat. (Staying compliant is the bigger challenge.)
I feel that the micro-cultivation licences will be hotly pursued, and it will bring literally thousands of craft growers into the legal industry. I also don’t believe that the large producers will be able to simply buy them all. First, it’s a massive amount of work managing other businesses – let alone dozens or hundreds of small businesses, especially spread out geographically – and if one is bought, another will pop up in its place. Given that we can’t import cannabis for resale purposes, it will have to be grown domestically. And if Joe and Susie can buy a simple greenhouse on their farm and cultivate wholesale flower – I think the premium flower market will stay in the hands of the craft growers. Large-scale operations can produce great product, but I feel that consumers like to buy local.
I also hear a lot of negative chatter around outdoor farming. In April 2017 I blogged about outdoor farming and I received a lot of optimism from farmers, and also a lot of pushback from indoor producers. Basically saying it can’t be done – the quality challenges are too great, etc etc. But let’s remember that cannabis is a plant; it’s meant to be outdoors (even if most of our climate is not favourable). Now, I don’t think outdoor product will be premium (or consistent) product. But that doesn’t matter. There’s always a market for cheaper product, but more importantly it will be a great source of molecules (extraction). The health products industry has been attune to standardizing plant extracts despite varying yields, and with the massive opportunity with finished products in 2019, I think the agricultural angle is massive. Imagine a whole industry of cannabinoid-infused cosmetics exploding in the years ahead – will they buy their cannabinoids from craft-grown extracts? Probably not. Do I think there will be an over-supply of agricultural bud? Absolutely, but we have many years until we get there I’m sure.
I also hear a lot of optimism around export. The conversation goes something like “Canada is an amazing market, but the EU is a significantly larger market – and they’ll be import-only for many years”. I feel this is misguided. Yes, I believe the larger industry is in the EU and USA when each move towards legalization in some form. But I can’t see them importing flower after a few years. With countries such as Lesothos, Colombia and even Zimbabwe (Google it) allowing cannabis cultivation for export purposes, Canada won’t compete.
So who will win the race? I believe craft growers have a massive opportunity, and I love the small business angle. Supply agreements will be their biggest hurdle. Farmers will grow the material for molecules (if they allow farming, and I think they will test drive it at first). Producers will get a short-term export opportunity for emerging markets; but time will tell if those are long-term plays without manufacturing in those countries directly. But I feel the biggest opportunity for the Canadian cannabis sector is around creating and perfecting the technology around finished products. Any unique dosage form or delivery system, coupled with unique branding and marketing, will be hard to replicate elsewhere in the world. Canada has a massive head start in the global cannabis industry, but we shouldn’t squander it on just cultivation. We need to gear up for creating unique finished products, which I believe is the largest opportunity.
In short, my message to those enterpreneurs who feel discouraged by the messages in the industry right now, is this: find a great niche market to focus on, don’t listen to the chatter, and build a great company. And don’t forget about vision – without this no one succeeds. Every successful company in the world was started by an entrepreneur – not a board of directors.