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Report on Business Cannabis Professional Why cannabis investors should not be discouraged by a few disappointing quarters

HIGHLIGHTS
  • The recently reported increase in seniors’ use of cannabis since legalization – albeit on a small scale – is welcome early confirmation of predictions.
  • Deloitte research suggests the top 13 cannabis markets globally are currently worth $100 billion today, and will reach approximately $200 billion by 2025.
  • A still-thriving illicit market, reticent to give up existing market share without a fight, remains ready and capable as ever to take advantage of each misstep.

Rishi Malkani is the cannabis practice lead for Deloitte Canada

Finding ourselves in the dog days of summer, but with the Labour Day weekend and back-to-school on the horizon, it’s time to take stock of Canada’s new and exciting cannabis industry as it moves toward another significant milestone this fall: the legalization of alternative cannabis products including edibles, beverages, topicals, concentrates, tinctures and capsules.

With this excitement comes strong headwinds for some in the industry. With the reporting of earnings from a number of Canadian LPs in recent weeks, we saw continued volatility in production costs as companies scaled up and selling prices fell as more supply came online and competition increased.

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New and evolving management teams are dealing with complex issues, from implementing and augmenting corporate governance practices and public company financial reporting, to dealing with operational and distribution challenges in an increasingly competitive environment.

With these challenges in mind, it is important not to lose the forest from the trees. We need to remember that Canada’s Cannabis industry has been forced to (and continues to) overcome significant obstacles.

The potential of this market is too great not to take these challenges on. Deloitte research suggests the top 13 cannabis markets globally are currently worth $100 billion today, and will reach approximately $200 billion by 2025.

A still-thriving illicit market, reticent to give up existing market share without a fight, remains ready and capable as ever to take advantage of each misstep. Competing with the well-established illicit market on quality and product variety is still a challenge for our LPs.

Regulators are dealing in real-time with issues pivotal to the ability of industry players to implement their business strategies. These issues are wide-ranging, and include classification of the product under various food safety regimes, significant restrictions on marketing and advertising of cannabis (and derivative) products, to overseeing the industry’s struggles as it tries to deal with the tracking and tracing of cannabis products through the value chain, right through to the end consumer.

Let’s also not forget the ongoing battle the industry is still facing in terms of its struggles in accessing traditional lending facilities, forcing participants to find creative ways to survive. The industry’s agility in accessing capital markets and non-traditional lending facilities is to be commended.

Looking beyond the news headlines, there are signs the industry continues to evolve in ways that are coming to fruition from early predictions on the future structure and shape of the industry.

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It’s important for all of us to keep in mind that the legal industry in Canada is in its infancy—growing pains will surface and companies will have to be patient as the business and regulatory environments settle.

And lost in the red ink, we saw a couple of players who are focusing on specific areas of the value chain (extraction, cultivation) have some early success; this kind of specialization along the value chain, often indicative of a well-formed and mature industry, is encouraging to see at this early stage of development.

Continued international scaling by Canadian cannabis companies is more proof the industry is growing. It is clear our LPs understand that this market is global, and the need to focus on international supply chains and distribution channels is critical.

Another positive sign is that the industry continues to attract investment and interest from parties well versed in dealing with complex regulatory environments, like tobacco and alcohol; indeed, there are few mentors better equipped to help those in the cannabis industry navigate the aforementioned complex regulatory framework.

Deloitte estimates Canadian edible and topical cannabis market worth $2.7-billion

Seniors were the only group to report slightly higher rates of cannabis use after legalization: Statistics Canada

Quebec ban of edible products a $300-million hit to industry, Deloitte warns

In addition to the recreational market where alcohol and tobacco companies are actively exploring, continued interest and investment by established players in the consumer-packaged good space, all of whom understand (or are rapidly bringing themselves up to speed on) the risks and rewards of participating in a rapidly developing health and wellness market for cannabis and hemp.

The recently reported increase in seniors’ use of cannabis since legalization – albeit on a small scale – is welcome early confirmation of predictions this cohort will be a significant driver of the cannabis health and wellness market now and in the future, even as we need to be patient for the more heavily regulated cannabis pharma market to take shape.

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As the industry prepares to rollout Cannabis 2.0 this fall, continued resilience and courage by the industry is a must. No doubt, there will be some missteps along the way; however, we should be optimistic as Canada’s new legal cannabis industry shows repeatedly its agility and strength in the face of obstacles.

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