Hi all, here is another in-depth post as a follow up to the lengthy write-up that I shared on Friday. Some of you may have already realized the following information, so this is for those that haven’t:
The cultivation of cannabis is becoming, and will continue to become, a commodity. As more growers enter each of their respective jurisdictions, the supply of dry bud begins to overwhelm demand, causing prices to significantly drop. This has been seen in Oregon, Colorado, Washington, etc. Likewise, as the globalization of cannabis continues to expand and push its way into new markets, this weight on prices will only get heavier as more geographical areas come online that have perfect weather for growing cannabis outdoors, all year-round. Overall, the global price of dry bud only has one way to move as time goes on...and that’s down.
And the exact same thing is going to happen to cannabis oil too as more and more extraction companies enter the space and pump out new supply. This can already be seen in California and other markets where cannabis oil has largely become just a cheap ingredient for putting into derivative products.
As this trend continues and picks up steam, it will be (and already is) more important than ever for all long-term investors in the cannabis market to be focused on putting their money into companies that are establishing footholds in branding and distribution, which are the two most valuable parts of the supply chain. Cultivation and extraction will continue to become commoditized, while CPG brands and access to shelf space will be key to protecting margins and building long-term competitive advantage and shareholder value.
But it is extremely hard to build successful brands when regulations on packaging and advertising are severely restricted like they are in Canada. The nation’s tight/conservative CPG regulations on packaging, marketing, and branding will greatly handicap all licensed producers that are trying to build brands and establish familiarity/trust with consumers when their 2.0 derivative products hit the market in December, January, and throughout 2020.
And this is just one of the big reasons why investing your money into companies that operate in the more lenient and business friendly US market is important. Here is another:
Canada Market
-2025 projection (according to New Frontier Data) for the size of the cannabis market: $9.2 billion
-Current valuation of top 10 cannabis companies: ~$20-25 billion
US Market
-2025 projection (according to NFD) for the size of the cannabis market: $26.3 billion (nearly 3x the size of Canada)
-Current valuation of top 10 cannabis companies: ~$15-20 billion
The Canadian companies do currently have access to international medical markets...but those markets (including Germany) have a long way to go to catch up to the infrastructure that has been built in Canada and the US, so that means a lot more work and investment needs to be put into it in order to get a dollar of return out of it.
It’s clear that the US market is more attractive from an investment perspective. And although there are many solid states to choose from, California takes the cake as the most important one. California is arguably the #1 distribution hub in all of North America. It is home to the nation's 2 busiest seaports, 6 major commercial airports, and an extensive freeway system and freight rail system. This all may seem somewhat irrelevant in the early days right now, but down the road when cannabis is rescheduled and legalized on a global scale this will be huge. The population of California is bigger than all of Canada (40 million residents and 100s of millions of visitors annually), yet the geographical area is 24 times smaller. Los Angeles County alone is more populous than 42 individual U.S. states. This type of population density makes it a lot easier for companies to both efficiently and effectively reach its target market (both from a marketing and distribution/supply chain perspective). It also makes these types of operational activities much less costly.
California was also the very first economy in North America to legalize medical cannabis (1996), which has resulted in the state becoming the largest marijuana market in the entire world. They already have a full-blown retail market that allows for the sale of numerous forms of cannabis, and they have way less stringent restrictions on distribution, branding, marketing, and packaging. There are an estimated 1,150 retail stores spread out across the state (a third of which, however, are still awaiting their recreational license – there are currently around 875 that have received their license and are operating legally within the new regulations) compared to around 470 in all of Canada.
And when thinking about the trajectory of future growth and potential, it also doesn’t hurt that many of the people living in California are influencers…
I am referring to the customer base in Southern California, and mainly Los Angeles, and mainly Beverly Hills, and mainly Hollywood; Celebrities, stars, and wealthy people (and don’t forget about Silicon Valley too). Do not underestimate the advertising power of word of mouth marketing and social media, especially when famous celebrities and major influencers are involved. California is a trailblazing region for all sorts of global brands for this very reason, and that will be the exact same for the global cannabis industry too…especially because of its long history as the king of cannabis culture.
If you haven’t already done so, then it’s time to shift all or some of your attention on investing in companies that operate in California and other US states that are focused on branding and distributing derivative products. Not only for all of the reasons explained above, but also because it still remains federally illegal and has yet to see institutional capital flow into it. Do you remember what happened to the Canadian LP’s stock prices back in 2016/2017 when deep pockets started to invest? At some point, the same thing is going to happen in the US as the laws and regulations push forward and allow for it. Don’t be late to the party and miss the cake.