Cannabis producers capable of consistently producing premium cannabis products have a potential advantage in saturated markets.
An emphasis on high-quality cannabis production is expected to help differentiate products when cannabis supply overtakes demand.
For many consumer products, it’s easy to convince the consumer that what they’re buying is a premium product. The cannabis industry is a little different. Like bottles of wine from a different vintage, each cannabis crop yields a different quality, fetching a different price point based on consumer preferences.
In the early stages of Canada’s legal cannabis industry, an excess of mid- to low-grade cannabis has flooded the marketplace. According to a recent report by Health Canada, the Canadian cannabis industry is currently operating with an excess of 114,628 kilograms of unfinished inventory. With an abundance of legal cannabis available in the Canadian marketplace, companies capable of delivering a superior product have a unique opportunity to differentiate themselves to consumers.
The Flowr Corporation (TSXV:FLWR) co-CEO Tom Flow believes his company’s strategy of targeting the high-end cannabis market on a small scale could be more sustainable in the long run. “I would say getting a large-scale greenhouse to produce premium, high-end flower is almost impossible, or not possible at all,” said Flow.
An incoming supply glut?
The Canadian cannabis market could be on its way to a supply glut in the near future. As Canada’s licensed producers continue to bring more growing capacity online, the country could find itself in short supply of the premium product discerning customers seek out. Various analysts have placed Canada’s cannabis demand at between 600,000 and 900,000 kilograms per year, which outpaces production capacity in the short term. However, Canadian production could reach as high as 3 million kilograms by 2020. In order to meet the demand for consistent, high-quality cannabis, producers like Flowr are working to optimize yields, ensuring they crop out the most cannabis possible under highly controlled growing conditions.
The Oregon cannabis market found itself with significant excess supply following the legalization of cannabis in the state, where prices dropped to as low as US$7 per gram as of October 2018. The current supply dynamics in Canada could result in a similar situation, with low-quality, high-volume producers struggling to see the margins they previously expected. The companies best positioned to survive this excess supply are likely to be those capable of consistently producing a high-quality product at scale.
Major Canadian cannabis producers like Aphria (TSX:APHA) have embraced irradiation as a means of delivering safe and compliant cannabis products. While not deemed unsafe for consumers, some growers see irradiation as highly detrimental to the overall quality of cannabis due to the fact that the process alters terpene content. In foods, irradiation has been found to cause vitamin loss and result in changes to the taste, smell and texture of produce.
“Beyond killing mould and other contaminants, irradiation also alters the terpenes — vital compounds responsible for the taste and smell of the cannabis. A lot of the black market product that consumers are used to smells and tastes great but can’t pass Health Canada standards,” explained Vinay Tolia, co-CEO of Flowr. “This is a lot of the reason we’re seeing complaints from customers buying legal products and finding it to be of very low quality. Irradiated products smell and taste inferior.”
Some producers have accepted the trade off in quality because irradiation has proven to be a cost-efficient and effective means of mitigating crop loss. Others, however, insist that there are better ways to protect cannabis crops. “Every time you buy a bottle of Heinz ketchup, you expect it to taste exactly like the last,” said Tolia. “That’s what consumers will expect of cannabis brands and we don’t think you can deliver that if you can’t control the growing environment.”
Consistent production standards key for premium bud
What exactly constitutes “premium” and “high-quality” cannabis can be somewhat subjective, but there are a few qualities associated with quality cannabis that go beyond simply potency. Quality cannabis product should look lush and green rather than brown. It should smell and taste in a way that suggests freshness and purity. Trichomes should be bushy and intact. All of these factors combine for a sensory experience that can provide a discerning consumer a sense of its general quality. Since these indicators can all be recognized by the naked eye and nose, they can be powerful sales drivers.
“Ultimately, consumers will need to look beyond just a well-known name or a specific strain and learn about where and how it was grown, how it was cured and whether it was irradiated or not,” said Tolia. “Those that do will find there’s only a handful of producers delivering premium-quality product, but they also will have found the keys to a great experience.”
The standards set out by regulators like Health Canada ensure that legal cannabis is grown in such a way that the resulting product is reasonably consistent and safe. Beyond these minimal standards, there is plenty of room for cannabis producers to achieve greater quality in their products. When it comes to quality cannabis, the best can be separated from the rest based on three basic pillars: consistency, craftsmanship and cleanliness.
Consistency is simply the idea that cannabis should meet the same high bar for smell and taste with each experience no matter which crop the product came from. The key to a consistent product is in the maintenance of high growing standards. Craftsmanship refers to the way the plant is cultivated, how the genetics are curated and the way the cannabis is cured and trimmed. Finally, cleanliness refers to the environmental conditions in which the plant is grown. Different conditions affect the chemical composition, and thus a quality plant needs to be grown in a highly controlled indoor environment. All these factors contribute to the scent, flavor and overall experience for consumers.
In a highly competitive market like the Canadian cannabis industry, brands capable of differentiating themselves from the competition have the most potential for success. As additional cannabis production comes online, companies that deliver a premium product on a consistent basis are expected to thrive, while high-volume, low-quality production facilities could face significant demand issues.
This INNSpired article was written according to INN editorial standards to educate investors.