It’s an exciting time for Canada’s legal cannabis industry, but it’s also a challenging one for emerging licensed producers (LPs).

Canada’s legalization of recreational cannabis for adult use has come to be, but that doesn’t mean the country’s laws and regulations regarding the plant are set in stone.


LPs across the country are racing to prepare the strategies that will hopefully establish their brand in a market that is quickly becoming crowded. As with all industries, effective branding and marketing is a crucial factor deciding whether a company will sink or swim as the market matures.

One of the top questions emerging that LPs should be asking themselves right now is how they can differentiate themselves, their brands, their customer experiences and more to stand out from the crowd and gain a competitive advantage. This is true with any industry, but cannabis adds extra challenges due to strict regulatory limitations, shifting policies that vary from province to province, and the inherent unknowability that comes with a brand new industry.

There’s a reason so many companies are looking to face these challenges. The market for cannabis in Canada is already massive. According to data from Statistics Canada, the country is home to approximately 2.05 million self-identified regular cannabis users, as well as 2.41 million people who will consider giving cannabis a try once it’s legal. StatsCan also estimates that Canadians spent C$5.7 billion on cannabis in 2017 with the vast majority of that accounting for illegal sales. Assuming that the numbers from the black and grey markets of 2017 transfer to Canada’s new legal market, cannabis in Canada is going to be huge.

Canada’s cannabis market doesn’t even tell the whole story for how critical the first few months of legalization will be to emerging cannabis companies. The brands that set themselves apart and manage to establish themselves as major players in Canada will be on good footing to move into other markets as other countries begin to follow Canada’s lead.

The opportunity for Canadian LPs to become national and perhaps even global giants in a new industry is clear, but that potential rests on being able to roll with the unique challenges of this new industry and stand out from the crowd from day one.

Challenges in Canada’s cannabis market

While there’s already a few big players in Canada’s medicinal cannabis market, the legal recreational market is going to be a different beast entirely from a marketing and branding standpoint. An LP’s branding strategy needs to reflect that, with a clear distinction between medical and recreational cannabis in almost every way. Consumer behaviors and preferences with medical cannabis differ drastically from recreational use in demographics, need states and even delivery method. Additionally, with medical cannabis, a company’s messaging is directed at physicians and healthcare professionals who act as the gatekeepers to the consumer. With recreational cannabis, however, marketers are speaking directly to consumers who are guided by preference and the type of experience they seek. Obviously, these two groups vary significantly in terms of what kind of outreach and messaging is going to resonate.

In Canada, the Cannabis Act has a huge influence on the branding strategies of cannabis companies. In some ways the Canadian government has not made this easy. Health Canada has imposed stringent regulations on some key branding areas. Packaging is limited to a single uniform color with a standard font style and no graphics outside of a brand’s logo. Brands are forbidden to use celebrity endorsements or fictional characters on their packaging or advertising. These rules are set up to keep cannabis brands from using any sort of lifestyle associations to sell their product.

Further complicating matters for LPs is the fact that the rules they are following are subject to change. Each province has its own differing set of rules and restrictions and with each province acting as a “test lab” for its own approach to regulation, these rules could likely be revisited and adjusted in the years following legalization. Geoff Kosar, VP Sales and Marketing for Canadian LP Wayland Group Corp. (CSE:MARI,FWB:75M,OTCQB:MRRCF), told INN that this means LPs need to future proof their brands for any potential changes that come their way.

“Generally speaking our thinking has been to prioritize ‘big bets’ on certain brands, while remaining nimble with some of the other brands in our portfolio,” Kosar said.

Another challenge presents itself when recreational cannabis companies try to understand their target consumers. By this point it’s well understood that decades of prohibition kept cannabis out of the hands of researchers and created a gap in our understanding of the plant’s medical properties. For similar reasons, we also have a cannabis market research gap. Most larger research firms remain wary about doing in-depth studies on cannabis. Premade, ‘canned’ market studies do exist for purchase by LPs but Kosar says that these studies rely heavily on government figures that his company believes are not representative of what’s truly happening with consumers across Canada.

“We have worked to pull together an industry-first approach of creating our own studies against general population, millennials and current legalized US states to give us what we feel is the most robust view of what the present and future of Cannabis consumption in Canada,” said Kosar. He says these studies paint a picture of who is consuming cannabis, when and why they consume cannabis, and which purchase drivers are most powerful, strategically positioning them in the market.

Takeaway

As a new industry with particularly stringent regulations, the Canadian recreational cannabis market will be difficult, but not impossible, to master. LPs are taking creative approaches from remaining nimble with multiple brands to circumventing packaging restrictions using augmented reality. A strong understanding of the Canadian cannabis consumer along with a well thought out branding strategy will be key to survival in what promises to be a highly competitive market. Even with the regulatory restrictions, Canada will certainly be the most advantageous place in the world to build a cannabis brand after legalization. This new Canadian market is full of potential and could potentially be a launching pad for the first global cannabis players.

Cannabis Market Update: Q3 2020 in Review

Click here to read the previous cannabis market update.

During the first few months of investment time in 2021, cannabis faced some volatility alongside optimism about federal changes in the most important market for the drug.

The cannabis business found its stride during Q1 thanks to policy change signals and consolidation.

To find out more, the Investing News Network (INN) asked experts about progress in the market during the first major period of the new year, and which developments investors should watch out for.

 

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Cannabis market update: New York and US potential boost operations

New York state’s legalization of recreational cannabis was a huge Q1 announcement that added pressure to the US federal government when it comes to cannabis policy, said George Mancheril, co-founder and CEO of Bespoke Financial, a debt financing business with a particular focus on servicing cannabis businesses.

“It’s going to add to the chorus of voices in the federal scene to basically move sooner rather than later,” he explained to INN.

Following the US election in 2020, the momentum for cannabis businesses went on the upswing, as did company valuations, with the idea of expansion at the heart of it all, according to Mancheril.

Before starting Bespoke Financial, Mancheril learned from traditional investment banks, working in the lending, fixed income and debt markets with Goldman Sachs (NYSE:GS) and Guggenheim Partners.

Nawan Butt, portfolio manager with Purpose Investments, agrees with Mancheril. The financial expert told INN the ongoing legalization process seen in the US market is leading to expansion.

“It’s becoming more of a national move, then small pockets of proliferation. That’s very exciting about cannabis right now,” said Butt, who co-manages the Purpose Marijuana Opportunities Fund (NEO:MJJ).

This proliferation effect is causing a change in valuations and enthusiasm for US-based operations. Mancheril told INN that by the end of Q1, multi-state operators (MSOs) had raised approximately US$3.3 billion.

The cannabis lender said he sees the industry as having grown from the woes of 2019; it is now undergoing a return to form as excitement about the US opening up increases.

The expert explained that there is likely to be a windfall of capital in the wake of major federal changes in US cannabis policy, although the timeline for these changes is becoming increasingly hard to predict.

Leading up to that capital influx, Mancheril said he wants to see operators really drill down on the value of desired assets and whether they make sense.

“What I’d hope is that we continue to see bullish sentiment, but with some measure of responsibility, and let’s not just get over ahead of ourselves,” Mancheril told INN. “The idea is let’s minimize the volatility and continue growing responsibly.”

 

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As far as struggles go, Butt explained that the cannabis industry has cemented itself as a growth-type sector, and as such there are macro pressures affecting the way these assets operate.

“We’ve seen this preference for cash flows at growth in the current or in the near future, rather than in the far future, and that’s what we’re seeing as far as valuations go in the broad market,” Butt said.

Cannabis market update: Volatility continues to rule as industry foundations build

Despite the industry’s potential and the growing pains it has gone through as a whole in both the US and Canada, volatility remains a key factor in the cannabis investment scene.

Butt explained that the current shareholder base, which is dominated by hedge funds and retail investors, still lacks enough institutional support to avoid the day-to-day volatility cannabis has come to be known for.

These two investor groups, Butt said, can be easily spooked and excited by the news of the day when it comes to their investments.

“A lot of these institutions’ strategies are not about short-term profits, but they’re about long-term sustainability of the businesses themselves,” Butt said.

“That’s why you see a lot of volatility in the space, and that’s essentially what we’ve seen over the past, I’d say, three to two months as well,” he added.

That means investors shouldn’t expect an end to volatility anytime soon.

“It’s not about whether we continue to expect volatility, because we do,” Butt said. “We really think that the volatility will be taken out when the shareholder base becomes more institutional, but it’s really about understanding why there is volatility in the first place.”

Cannabis market update: Canadians talk up US business, but questions remain

A surge of mergers and acquisitions has taken over the Canadian cannabis sector recently as more producers see potential in America.

One of the biggest announcements in this regard came when Organigram Holdings (NASDAQ:OGI,TSX:OGI) secured a C$221 million investment deal from British American Tobacco (NYSE:BTI,LSE:BATS).

Using the funds, the two will work in tandem to develop new branded products designed for the international stage, including in the US. Organigram CEO Greg Engel previously told INN that the US represents a critical opportunity for Canadian companies, but the entry point isn’t as clean as it could be.

 

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While the long-term potential may be exciting for investors, Butt told INN he’s still unsure how the approach will work for Canadian companies.

The Purpose Investments expert said there will be plenty of space for the biggest Canadian names to pursue US market entries, beyond the initial hemp-derived CBD moves some operators have mde, since the US represents the biggest market in the world.

“But there’s just way too many unknowns right now to say exactly what that participation is going to look like, or when that participation will happen,” he said.

“What we do know is that currently the US MSOs are in a wonderful sort of position to expand on their market leadership that they have. And it will be tough for Canadians to come in and compete with them,” Butt said.

Canadian players still retain the upper hand at times in terms of valuation, which is confusing for both Butt and Dan Ahrens, chief operating officer and portfolio manager at AdvisorShares.

“The performance in quarterly earnings of US companies has been rather spectacular. They’ve knocked it out of the park in most instances,” Ahrens told INN.

Butt praised the recent performance reports from MSOs across the board, pointing to year-over-year growth lines and projections for continued positive performance. In his view, share prices still don’t reflect company value. “Those are really being discounted at this point,” Butt told INN.

“We’ve seen the Canadian licensed producers be really hot stock performance-wise, outpacing the US (MSOs), and I’ll say it’s rather nonsensical to me,” said Ahrens, who oversees the AdvisorShares Pure Cannabis ETF (ARCA:YOLO) and the recently launched AdvisorShares Pure US Cannabis ETF (ARCA:MSOS).

Cannabis market update: Investor takeaway

The cannabis investment proposition finds itself at an interesting moment in time, as the entire sector eagerly awaits confirmation in the US at the federal level.

While for the Canadian companies waiting on the sidelines, this development may feel like a major necessity to address current financial struggles, for US-based operators, the heat around the corner could represent future positivity for already thriving operations.

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