Roll-out of Cannabis 2.0 forecast to generate higher profits for retailers than current legal cannabis products

Striking an irresistibly sunny and reassuring tone, the forecast in Deloitte’s third annual industry report on cannabis legalization is decidedly bright, estimating the next wave of adult-use cannabis legalization in Canada could create an annual consumer market of $2.7 billion for edibles and other alternative cannabis products.

“The edibles market alone is estimated to be worth at least $1.6 billion a year in Canada, with cannabis-infused beverages adding a further $529 million,” Jennifer Lee, a partner at Deloitte Canada tells The GrowthOp.

The choice of tone in the report, Nurturing new growth: Canada gets ready for Cannabis 2.0—which includes cannabis edibles, derivatives and concentrates, expected to become legal by Oct. 17, 2019—serves a purpose. “We interviewed a number of stakeholders who are our clients, and people in the government that we knew, and, overall, there was a general frustration, and we need to buck that trend because there’s never been an industry that has launched like this,” emphasizes Lee, who is also Deloitte Canada’s cannabis national leader and consumer advisory and analytics practice national leader.

“If you look at the report, we want to bring some light to the industry because, truly, we just set up a new industry, we haven’t seen a disaster, we’ve seen capital flow into Canada and we’re the first G7 country to lead in this sector,” she says.

Time to ditch the negativity and focus on the positive

With the global cannabis market worth an estimated US$100 billion, combined among the top 13 cannabis markets, the report expects the new products will create valuable growth opportunities for the Canadian cannabis sector and help maintain the country’s leadership position. (As per Deloitte research, based on both market opportunity and the current state of cannabis legalization, the 13 markets are Canada, the U.S., Mexico, Australia, the U.K., Italy, the Netherlands, Belgium, Switzerland, Germany, France, Poland and Spain.)

Based on the estimated size of its edibles and other alternative cannabis products market, the report further anticipates retailers will generate higher profits than is the case with the current slate of legal cannabis products.

In Deloitte’s industry report last year, A society in transition, an industry ready to bloom, which looked at how consumption levels might change after legalization, it estimated total sales could exceed $7 billion in 2019 after the second round of legalization. The report focused on Cannabis 1.0, which includes dried cannabis, cannabis oil, raw cannabis, cannabis plants, cannabis plant seeds. (Lee led both the 2018 and 2019 reports.)

“The speed with which Canada’s cannabis industry has evolved over the past 18 months has been truly remarkable,” the latest report notes. Referring to novice consumers as “cannabis-curious”, the report champions the bold and points out that Deloitte “believes that companies with strong leadership, strong business fundamentals, a focused strategy—and a willingness to act courageously—will win.”

Where could the cannabis market go?

To help frame its findings, Deloitte used data gathered from a sample size of 2,000 adult Canadians across the country who were surveyed online between Feb. 26 and Mar. 11, 2019. The sample—across all age, gender and geographic regions—involved respondents who answered questions on their current and intended use of alternative cannabis products. This input was enhanced by about 45 in-person interviews with licensed producers, retailers, members of government, analytics companies, tech companies from Israel and venture capital firms, as well as point-of-sale data from cannabis retailers in Colorado, Washington, Nevada and California for period running from March 2016 through February 2019.

One prediction around edibles is that legalization of related products containing cannabis and cannabis concentrates will create new product mixes that will reach consumers who may have been reluctant to try currently available cannabis consumption methods. The expectation is many of these novice consumers will be older, often female, Canadians who will prefer more common consumption formats, such as baked goods and gummy candies. Almost half of the “likely edible users” plan to consume these at least every three months.

Alcohol and tobacco companies, for their part, are looking for opportunities to enter the legal cannabis industry, as are pharmaceutical companies, to avoid losing market share, the report notes. This could continue to fuel an already active market for mergers and acquisitions in the cannabis sector.

Canadian firms well-positioned to advance at home, abroad

Deloitte estimates next round of cannabis legalization will create a new $2.7-billion market in Canada. Canadian cannabis companies are expected to be well-positioned to capture part of what will be a significant global market. Deloitte projects that the global market for alternative cannabis products will almost double to US$194 billion by 2025.

“The vast majority of this burgeoning Cannabis 2.0 market will be cannabis extract-based products, including edibles,” the report states. Specifically, for the Canadian market, it expects edibles will account for about $1.6 billion of the annual spend, $529 million for cannabis-infused beverages, $174 million for topicals, $140 million for concentrates, $116 million for tinctures and $114 million for capsules.

Several companies, with Tantalus Labs being one of the latest, have announced their entrance into the beverage market so far this year. Lee’s prediction is that those companies will see this report and feel encouraged. “Our view,” she notes, “is that even though beverages and edibles are still a small percentage of the overall cannabis market in the U.S., Canada will be truly different. I believe that we can actually drive innovation in this category given our nation-wide scale and the U.S. doesn’t have that. And we have a growing alcohol category of people who engage with alcohol in the same situations as they do edibles and infused beverages.”

There’s just one thing that didn’t make it into the report, and that is a mention of the growing job force. “The other thing I found really striking in my experience is the number of jobs we’ve created through new companies and entrepreneurship,” Lee says. “We don’t reference it in the report, but we should really pause and give credit to the industry for creating these new jobs,” she adds.

Statistics Canada reported last November that 58 percent of cannabis-related jobs at the time were in the agriculture industry, where workers performed duties such as bud trimming. The rest of the employment was spread across other industries such as educational services, health care and retail trade.

Storm clouds have silver linings

“There will be missteps, delays and frustration,” the report notes. “This is to be expected in an industry that just launched and is becoming more adept at navigating the need to balance consumer education and consumer experience while operating in a tightly regulated market.”

Deloitte acknowledges that Canadian cannabis companies currently enjoy significant advantages over their U.S. and global counterparts, including government support, access to capital markets and the banking system, and a unified market that is more scalable than the fragmented one south of the border. That said, the introduction of the so-called U.S. Farm Bill is expected to be a game-changer; Canadian companies will need to continue innovating to secure a strong, sustainable competitive position as legislation evolves in other countries.

Deloitte also cautions that Canadian cannabis companies will need to manage consumer expectations, as the preferred edible formats may not all be available when once Cannabis 2.0 takes effect.

What should companies do to keep pace and thrive?

Deloitte’s recommendations going forward include adopting a focus on innovation to secure long-term competitive advantage; implementing a more sophisticated, comprehensive, real-time seed-to-sale system; and using data to better understand consumers and improve products.

“The global cannabis market is enormous, and Canadian firms are well-positioned to play a pivotal role as this market grows and evolves,” Lee notes in a company statement announcing the release of the report. “Cannabis companies with strong professional leadership and business fundamentals, a focused strategy, and a willingness to place bets—while playing the long game to wait out the changing regulatory environments—will be the ones who succeed and prosper,” she adds.

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