Canada is defining a new problem – a national cannabis shortage. For the first time, headlines will describe the efforts of multi-billion dollar companies to get more cannabis into stores. Prohibition is an expensive policy, socially and financially. Moving forward from prohibition to regulation means displacing an entrenched illicit market while maintaining appropriate public messaging, particularly with children.
The market for adult use cannabis is undeniable. The existing illicit supply chain is vast and competitive in price and product variety. Successful implementation of the federal Cannabis Act will require players with the sophistication to effectively comply with strict regulations. And also supply cannabis. Lots of it.
Consolidation of Canadian corporate cannabis is well underway and the future of this capital-intensive industry is apparent – a handful of companies will control the majority of the market, similar to mature regulated industries such as beverage alcohol, food, pharmaceuticals and tobacco. With a few heavily capitalized leaders and players from outside the cannabis industry taking a stronger interest, consolidation will accelerate. Pressure is increasing on smaller players to distinguish themselves and attract investment or a favourable valuation at acquisition.
The Cannabis Regulations diversify federal licensing into seven categories: cultivation, nursery, processing, analytical testing, sale for medical purposes (direct to customer), research, and production of drugs containing cannabis (not to be confused with medical cannabis). The significantly revamped Industrial Hemp Regulations allow use of hemp flowers as inputs for high-CBD cannabis oil, a product with great demand in the medical cannabis market. Provincial and territorial law allows private retail outside of Quebec, Nova Scotia, New Brunswick and Prince Edward Island.
With more ways to play, cannabis companies will be free to author their specific path to success. At the upstream end, cultivation will benefit from proprietary growing technology and stabilized cultivars to lower production cost, increase yield and avoid crop failure. Unusual plant varieties that stand out will be valuable, but upstream success will be found in reliable and cost-effective yield. Partnerships with established agricultural partners and access to a diverse library of cannabis varieties will each be a huge plus.
Cannabis products are the foundation of the industry. Saleable classes of cannabis will remain limited to dried cannabis and cannabis oil (for eating, not vaporizing) at the outset. Product diversification and regulated sale of edibles (including beverages) and concentrates are expected in late 2019. Based on trends in Colorado and other states with regulated cannabis markets, edibles and concentrates will gain tremendous market share
Midstream processing of cannabis oil, edibles and concentrates will provide many lucrative opportunities. A competitive operator will have mastery of extraction, distillation, formulation and packaging to provide quality results with efficient use of inputs and operator time. An understanding of scalability and supply chain, likely through connection to beverage alcohol, food, natural health products or pharmaceuticals, will be a must. Significant partnerships with beverage alcohol and more recently soft drinks have been announced over the past year and we can expect to see more than one approach to defining a new and lucrative archetype – the cannabis beverage.
Cannabis products are chosen based on user experience, which begins with browsing and purchasing. Downstream success will be founded on a satisfying consumer experience, whether online (medical and adult use) or in a storefront (adult use only), predicated on effective and compliant packaging, labelling, and promotion. Connection to retail supply chain and marketing expertise, particularly from regulated consumer product industries including alcohol, pharmaceuticals and tobacco, is a tremendous downstream asset.
Explosive growth and consolidation will continue as this newly-regulated industry becomes a fixture of Canada’s economy. Gone are the days of 2014 when the business model of “get licensed, sell product” sufficed. Canada’s regulated industry must innovate, manufacture, market and retail compliant cannabis products while out-competing the illicit market. Winners in the next phase of this industry’s development will identify a specific opportunity and focus on it with an appropriate road map for acquiring regulatory approvals, talent, partnerships and technology.
David Wood, Ph.D., is co-chair of the Borden Ladner Gervais LLP cannabis industry focus group. He is a lawyer and patent agent practicing from BLG’s Calgary office. The vast majority of his practice is in the international cannabis industry.
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