The “green rush” that saw dollars fly into the Canadian Cannabis industry is now decidedly behind us. Now the companies born and grown during the height of the hype are wilting or dead. Yet the industry hasn’t shrunk. Far from it. One of the main causes of its slump is its massive size, with supply far exceeding the capacity for retail infrastructure and bureaucracy.
This has been a disappointment to many. Medical cannabis patients saw some of their producers flock to the lauded lucrative legal market, keeping many stuck in the informal sector. Eager consumers were stymied by high prices and poor access, while producers were disappointed by high taxes and harsh regulations. The illicit cannabis market on the other hand has been somewhat bruised but came out, if anything, on top; to the disappointment of politicians and law enforcement alike.
Yet despite all the bad news, Canadian Cannabis remains a booming sector, with dynamic companies, high volume revenues, and constant innovation. What promising paths exist that the sector might go down to the profit of all in the next few years?
Returning to the roots, Medical cannabis should not be forgotten
Many of the militants and lobbyists who pushed so hard for the eventual legalization of cannabis were already legal consumers of cannabis. Medical cannabis. In a prime position to understand the advantages the plant offered as a treatment for pains, anxieties, and more severe conditions, they would be ardent proponents of its wider access. And while they have not always been pleased with the results of the legalization, they are a growing consumer base in Canada and abroad.
Producers have a clear incentive to fill the niche and fast. Estimates put the market size in Europe alone at several billion and growing fast, with South America, Asia and even Africa catching up. With a leg up over their future competition, Canadian companies can position themselves well as a premium exporter of quality medical grade products. Indeed, deals with Israel and demand in Germany suggest this is already the case.
With stable demand and strong profit, the medical industry has a leg up over recreational as insurance means that customers can cover the higher costs required by the legal market. It also gives them a very good incentive to do so. Unfortunately, the medicinal market is not sufficient to cover the production capacity or innovation potential of the Canadian cannabis market.
Canadian cannabis innovates in edible and derivative products
When Canada finally allowed the production and sale of cannabis derivative products, such as edibles, vape pens and more, investors hailed this “Cannabis 2.0” as the solution to their woes. Unfortunately, the implementation was slow, haphazard, and failed to live up to the hype. Consequently, stocks continued to drift downward. But there is still hope for the growing sector.
Data from the US states which have legalized cannabis on a large scale offer hope for Canadian producers. The data suggests that only 45% or so of the market will remain in the combined ‘value’ and high-quality flower business. The fastest-growing alternative is vape pens, which cover almost 25% of demand in U.S. data yet, in Canada, have only reached 15% of the market, indicating strong potential for growth.
With the added benefit of better health and easier consumption, vape pen cannabis alternatives are appealing to Canadians. The next generation of consumers, who are a growing demographic whose consumption patterns will determine the industry’s shape in the near future. Emerging data from the first year of Canadian cannabis derivatives back this up as well, showing vape pens as the fastest growing sector.
From a business and industry perspective, cannabis derivative products also offer stronger profit margins, and greater potential for added value.
Canadian cannabis companies dividing the market to better rule it?
One narrative that has emerged in 2020 is the popularity of cannabis companies ‘value’ product lines among Canadians. Several companies have launched cheaper versions of their products, clearly aimed at competing with the illicit market, which maintains a strong foothold.
These cheaper varieties are sometimes looked down on as lower quality, but the truth is often that they just reflect lower profit margins for the companies. Yet doing so is a key strategy to capture a greater market share, and provide an acceptable cannabis alternative for price conscious Canadian consumers. Interestingly we can see this strategy and the cannabis derivatives strategy at work simultaneously among some Canadian companies.
At the same time, these Canadian cannabis companies offer higher ‘quality’ luxury style products aimed at the gentrified or health conscious consumers. Aiming for new (taste) buds, higher yield plants, exotic brands, or other methods to add value and capture higher profitability.
Whether not one, or both, of these strategies will pan out, is of course, a test for time. But you should keep your eye on Canadian innovators looking outside the box, as the basic cannabis company crate is overflowing. But there is room in the more profitable margins for much, much more.
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