Wave theory: Where does cannabis industry go from here?

Like any new industry, the cannabis sector is dynamic. Regulations around the world seem to change constantly. Entrepreneurs set their eyes on cannabis and launch new ventures focused on capturing consumer mindshare through things like consistent, frictionless experiences. Large scale service providers, like law firms, round out their service offerings to help cannabis companies scale. 

The cannabis industry is growing fast, with the global legal cannabis market expected to grow at an 18.1% CAGR from approximately US$17.7 billion in 2019 to US$56.7 billion in 2027 (Grand View Research). The number of cannabis companies also continues to grow. As of early 2020, our team had heard over 2,000 pitches.

These pitches have come from all over the world and across all parts of the cannabis value chain. Looking back on these, we asked ourselves what swells in cannabis entrepreneurship in given areas of the world tell us about how the market will develop. And we saw a pattern emerging. With some exceptions, we think most countries are following a five-step process towards maturation:

Wave One: Cultivation 

Cultivation licences are viewed as valuable in highly competitive application processes. Assuming it takes up to two years to get operations up to speed, the scarcity of licences may provide a first mover advantage to those that get licensed early on. This means that North American players looking to get started in cultivation are likely too late and may have trouble finding financing. In much of the rest of the world, cultivation may still be a viable business opportunity as new markets begin to regulate cannabis. 

Wave Two: Ancillary 

The ancillary industry includes products and services related to the broader cannabis economy. It becomes a key component of the value chain once cultivation is established and consumer products begin to emerge. These “pick and shovel” businesses are generally subject to less risk given they do not directly touch the cannabis plant. They may also be easier to scale and may present an easier way for executives from established sectors, such as technology, to test their entrepreneurship might in the cannabis sector.  

Wave Three: Consumer Packaged goods (CPG)

In Canada and many U.S. states where cannabis is legalized for recreational use, we are just beginning this phase. Customers are testing a variety of products and formats, and new businesses are entering the scene. But at this point, if you ask a large multistate operator or Canadian licensed producer what sells best, they’ll likely say “more than 20% THC, cosmetically appealing bud, and a strong terpene profile”. What they likely won’t say is a brand name. As this wave progresses, we expect brands will capture consumer mindshare with strong distribution channels, and by providing consistent, frictionless experiences that match specific activities or lifestyles.  

Wave Four: Big Pharma 

Long term, we expect that the medical cannabis market will outsize the recreational cannabis market. However, the approval of new pharmaceuticals could take 10-15 years to reach the market; with the exception of orphan drugs that are expedited in some circumstances. According to the U.S. National Library of Medicine, there are approximately 700 studies taking place globally with cannabis as an intervention. While many are funded by cannabis companies, some are independent double-blind experiments that could move the industry towards being able to add health claims on packaging (ex. cannabis for arthritis, sleep disorders, etc.). Companies that can lock in lucrative intellectual property will likely have an edge, as we expect that the medical cannabis market could eclipse the total market size of the recreational market size. 

Wave Five: Mass Market 

The last wave is maturation, where you have a small number of companies that dominate the industry through mergers and acquisitions. These giants are forming today, but the global market is young and we expect there will still be lots of movement as new markets, particularly the U.S., liberalize their cannabis regulations. Similar to Coke or Pepsi in consumer-packaged goods, we think these companies will be global in scope, and experts in marketing and distributing a range of cannabis- or hemp-derived products. As a result, start-ups will likely face difficulty in getting shelf space in dispensaries and stores. Customers in mature markets may also begin to show signs of customer loyalty through repeat purchases.

Where does this leave us? First, it’s still early. We only just got through the cultivation phase recently in North America, but there are many big international markets (Europe, China, South Africa, etc.) where new cultivators could flourish. Second, even though cultivation is generally played out in North America, we think there’s still a lot of growth potential in ancillary businesses, brands, and the medical market. 

We believe that a key catalyst for unlocking this growth will be U.S. federal legalization. This milestone could make the industry more mainstream, attract institutional capital, and begin to push other countries to follow suit. As these dominoes fall, the wave theory will be tested on a global scale, and we expect a number of countries to be wading across each wave at any given time.

This is not an offer to sell or a recommendation to trade in any securities. This information is provided as of the date hereof. This document contains data obtained from third parties that Canopy Rivers has not independently verified. This document also contains forward-looking information within the meaning of Canadian securities law, which is based on certain assumptions. While management believes these assumptions are reasonable based on information available as of the current date, they may prove to be incorrect. Many assumptions are based on factors outside of Canopy Rivers’ control and actual results may differ materially from current expectations. Forward-looking information involves risks, including, but not limited to, the risk factors set out in Canopy Rivers’ most recent Management’s Discussion and Analysis and Annual Information Form. You should not place undue reliance on forward-looking information. Except as required by applicable law, Canopy Rivers assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances.