Here’s What You Should Know About Canada’s Emerging Weed Industry

The following was originally published on Huffington Post on January 3, 2018. The legalization of recreational cannabis “next summer” will usher in a globally competitive, sophisticated and lucrative new sector. The year ahead is a pivotal one in Canada’s economic history. The legalization of recreational cannabis “next summer” will usher in a globally competitive, sophisticated and lucrative new sector. While most Canadians are now familiar with the expected economic scale of the cannabis sector — an estimated base market of $8.7 billion and an ancillary market of over $22.6 billion — the business trends shaping the Canadian cannabis sector are still relatively unknown to those outside the industry, but important to know as legalization approaches. Here are the five major trends shaping Canada’s cannabis sector: 1. Consolidation Licensed producers, or LPs, are at the core of the cannabis sector. These are the companies — many of them publicly traded — that hold the licenses to grow, harvest, dry, trim, cure and package cannabis. Currently, there are only 84 licensed production facilities in Canada — but the numbers are likely to grow rapidly as a result of Health Canada recently introducing changes to streamline the application process, and so, another 200-plus are expected to come to market in the very near future. The past few months have been defined by a frenzy of LP mergers and acquisitions. Some of the biggest stories of the year were the strategic maneuverings of these players, including Aurora’s desired takeover of CanniMed at the same time that CanniMed was attempting to acquire Newstrike. In the past two weeks, we saw Aphria — one of Canada’s largest LPs — making a major investment in the space by taking a major position in the DOJA/Tokyo Smoke merger. This trend is expected to continue into 2018, narrowing the field to just a few key players much like Coke and Pepsi. New entrants to the market will need to focus on niche artisanal appeal or be prepared to compete with much bigger players. For consumers, the impact of consolidation should initially mean lower prices as the large players vie for consumer brand loyalty — but perhaps fewer brand choices at retail locations.

2. Product innovation

For many Canadians, “cannabis” still brings to mind a rolled joint or maybe a pipe. But, as those engaged in the medical cannabis industry know, the innovations in ingestion options are exploding. The list now includes include vaporizers, edibles, patches, drinks, lubricants and mouth sprays, among others. These products are expected to significantly change the recreational habits of Canadians as they have for patients. Imagine going to a cannabis retail shop on New Year’s Eve and being able to choose the right cannabis products for the evening you will have. Do you have plans for a cozy night by the fire strain or a raucous night of dancing? Are you rolling joints or are you in the mood for an edible? Have you tried the cannabis-infused wine? What about the amazing cannabis products for your next-morning hangover smoothie or infused tea?

3. Uncertainty

Prime Minister Justin Trudeau recently announced that cannabis will become legal in Canada sometime “next summer,” and not on July 1 as had become the public expectation. While not a substantial change, it is illustrative of the type of delays, regulatory adjustments and compliance additions that those involved in or working with the industry have come to expect — both on federal and provincial levels. A recent E&Y Report highlighted that the cannabis sector continues to face an uncertain operating landscape. Many of the rules that govern the recreational industry have yet to be finalized. As well, a wave of new competitors — particularly with cannabis products — are expected to enter as existing lifestyle and luxury brands expand into the sector. Strong regulatory and market uncertainty means that regardless of the size of the company or investor, organizations will need to be prepared to be nimble and remain highly entrepreneurial. This means companies will need to have the ability — despite organization size — to rapidly seize on unexpected opportunities, quickly hire new talent and pivot as needed. (It also means that if you have done any work in quality assurance for either food or pharmaceuticals, you have likely been contacted through LinkedIn a about a job in the sector.) Similarly, investors should proceed with the understanding that this is a volatile landscape — so much so that the TSX recently suspended the trading of shares of several leading Canadian cannabis companies because of sudden stock price swings.

4. The importance of provincial and local government

While Cannabis legalization will happen on the federal level, it will be administered, in large part, by the provincial and then local governments. The federal government will be responsible for regulating the production of cannabis, possession limits, trafficking, advertising, the tracking of seed to sale, establishing minimum age limits, personal cultivation and the continued oversight of the medical cannabis regime. However, many of the aspects of legalization that will most directly affect business will happen at the local level. Provinces and territories will govern wholesale and retail distribution, the selection of the retail distribution model and workplace safety. Provinces will also have discretion to set higher age limits or more restrictive possession limits. In Ontario, for instance, the province plans to set up approximately 150 standalone stores by 2020 — but only 40 to start — all of which will be run by the Liquor Control Board of Ontario. A subsidiary of the LCBO will run the stores and the agency itself will oversee the planning process to establish their locations. For consumers, this means you can expect long lines at peak times in Ontario and, perhaps, limited choices as the LCBO-run shops open up (keeping shelves full will be a tough task for the limited number of LPs currently producing). On the municipal level, decisions around zoning, business licensing, building code, municipal workplace safety and enforcement of regulations around public consumption and impaired driving will have significant impact on the ground and market realities of the sector. In Ontario, municipalities are now finding out whether and where a provincially run cannabis store could be located in their communities — and if they have any ability to influence those decisions. The Federation of Canadian Municipalities (FCM) also anticipates that municipalities may have shared responsibility for public consumption, retail locations, home cultivation, taxation from cannabis sales, public education, public health and law enforcement.

5. The global opportunity

The current focus is on recreational cannabis in Canada but an even more significant opportunity is for Canada to lead the growth and development of the medical cannabis sector. Medical cannabis is one of the world’s newest, fastest-growing and most complicated industries. The ripple effect of a targeted focus on growth in the medical cannabis sector would be to strengthen Canada’s life sciences sector in terms of research, global talent attraction, employment and therapeutic options for patients. This is a sector that the federal government should proactively drive as part of its prosperity and innovation agenda. Canada is already well positioned to do this, since, for the past decade and a half, we have built the most sophisticated medical cannabis framework in the world. As an earlier contributor pointed outlast year, the amount spent on global cannabis, including medicinal, was US$150 billion. By comparison, Canada’s crude oil exports totalled CA$49.8 billion in 2016. Canadian LPs are already exploring new medical and therapeutic research and product development, and international research partnerships and projects being formed. This is a key advantage Canada has over the fractured, state-by-state cannabis regulations in the United States. 2018 will be a big year in the cannabis sector in Canada. We, along with the rest of the world, are certainly looking forward to watching it unfold. Jay Rosenthal is the Co-Founder & President of Business Of Cannabis, Canada’s authoritative source for news and analysis of the sector. Find out more at: businessofcannabis.ca