In the last few years, cannabis 2.0 has become shorthand for the introduction of derivative cannabis products to recreational markets. This includes products that go beyond dried flower, including edibles, beverages, vapes, and tinctures. But with these products rolled out in Canada and the U.S., it’s only natural that industry observers would start asking “what’s next?” It was also the question posed to us by Global Cannabis Intelligence when they asked for us to participate in their recent virtual summit.
While cannabis 2.0 was product-focused, we think the next wave — let’s call it cannabis 3.0 — will be more dynamic. It will include several trends, some of which are already underway, and could take years to develop fully:
Cannabis 2.0 introduced less traditional cannabis products. But we think that cannabis 3.0 will see typical cannabis attributes — THC percentages or terpenes — take a backseat to occasion or function. Brands will use cannabis as an ingredient in products, but cannabis and its properties (THC percentage, for example), will not be front and centre. These products are starting to appear today — Canopy Rivers portfolio company High Beauty manufactures hemp-derived beauty products — but cannabis 3.0 will see these products go mainstream. We think that in the long term cannabis will be an ingredient that consumers will find in pharmaceuticals, personal hygiene, animal health products, and other product categories.
Cannabis 1.0 and even the early days of 2.0 were largely conducted in darkness. Companies launched brands and products with little knowledge of consumer behaviours and desires. This approach, which amounts to little more than a prayer, is no longer feasible in cannabis 3.0. In Canada, consumers can choose from products from over 300 licensed producers, and as of August 2020, none of the brands created by these producers had achieved more than 20 per cent brand awareness. We think that the brands who cut through the noise, and leverage industry data to fully understand their consumer, will capture disproportionate market share in cannabis 3.0.
Even as cannabis 2.0 products hit shelves in Canada, licensed producers held their place at the helm of the cannabis industry. This is mirrored in the United States where multi-state operators, rather than the brands they produce, are at the forefront. We don’t see this holding, though. Like beverage alcohol or even snacks, we think that brands will become the household names in cannabis. Like we go for Miller Lite rather than just any beer from Molson Coors, so too will be the case for cannabis.
The key for brands is to ensure that they can use the aforementioned data to segment a specific audience, and then deliver a product that’s consistent in duration, onset, effect, and outcome. We think that brands which continue to try to be everything to everyone will fall by the wayside as more specialized, focused brands emerge.
When we say that cannabis 3.0 could take years to mature fully, it’s really this point we have in mind. There is still lots of work to be done on cannabis regulatory reform. But we also believe that the momentum picking up today is unstoppable. In November’s U.S. election, every cannabis-related ballot initiative passed, including recreational legalization in New Jersey (where we believe that our portfolio company TerrAscend is particularly set up for success), South Dakota, and Arizona. This state-wide momentum could continue to carry the industry forward while legalization remains a question mark at the federal level.
Internationally, legal cannabis adoption has been slower than the optimistic estimates that followed Canadian legalization. But much like the U.S., things are progressing. Europe’s top court recently ruled that CBD is not a narcotic and European nations could not ban CBD products. The United Nations also reclassified cannabis, saying it is no longer a risky narcotic. In Latin America, Mexico’s senate approved a bill that would legalize recreational cannabis. MJ Biz Daily notes that this bill still faces some hurdles, including approval by the government’s lower legislative chamber.
Cannabis 3.0 is a dynamic process with a lot more nuance than what we saw in cannabis 2.0. It’s the maturation phase for an industry that is gaining momentum globally. With cannabis still in a rapid growth phase — growing 8-15% month over month in Canada and becoming legalized in more U.S. states — we believe that the major catalysts are in place to launch the industry into its next evolution.
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.
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