NedStark wrote: One last update to the write-up. Please share this with as many friends, family members, and investors in your network that you can. The more people that understand where this market is headed the better. We are all here to make money for the future:
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 as their 2.0 derivative products continue to hit the market 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 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.
And if you are wondering what type of derivative product to invest in then here is one suggestion: Beverages.
Cannabis beverages with THC are going to become a transformational, disruptive product. Drinking is in our DNA. It is part of almost every single social setting whether it’s a business convention, sports game, restaurant, bar, etc...people love to drink and it has become ingrained into many aspects of our lives. Investors need to put more focus on what the long-term cannabis market is going to look like 5-10 years down the road, or even more. Cannabis is going to become just as mainstream and widespread as alcohol is today. In the future, people are going to look back on marijuana prohibition the exact same way that they look back on alcohol prohibition (and probably with even more confusion than alcohol since marijuana actually has medical uses). And there are going to be way more people that enjoy cannabis than there is right now.
With that being said, there are still going to be a large portion of the population who will not want to smoke it. Smoking, in general, has a negative connotation because it is immediately associated with cigarettes, which everyone knows is the best way to slowly kill yourself. Even though smoking cannabis isn’t anywhere near as harmful as cigarettes, it will still always have that negative perception about it, which eliminates a very large customer base. There is a much higher percentage of the population that drinks alcohol than there is that smoke cigarettes. Smoking, whether it’s by burning or vaping the plant or oil, has a much more limited potential customer base compared to drinking. Society has agreed that drinking a substance with psychoactive effects is more acceptable than inhaling it or injecting it. There are just more people on this planet that would drink a product versus smoking a product.
Not only is it going to become one of the top ways that users consume cannabis in the future, but it is also going to be the method that provides the easiest transition for first time triers…especially THC drinks that taste like people’s favourite, go-to alcohol beverage, which they are routinely accustomed to drinking. And the ‘new user’ target market is massive...
There are roughly 370 million people living in North America and about 275 million of them are between the ages of 15-65. Within this demographic, roughly 45 million people use cannabis. And out of this 45 million people, about 15 million of them use cannabis daily or weekly. So out of the roughly 275 million potential customers, heavy cannabis users make up 5% of it. There are 30 million other current cannabis users (who use cannabis monthly or yearly) and 230 million other consumers (who haven’t yet been interested in cannabis) to still capture as customers.
The consumer base that isn’t currently interested in cannabis absolutely dwarfs that of heavy cannabis users/connoisseurs who use weed daily. The population of new users that will come onboard over the next decade is immensely larger than the number of daily users that exist today. And the majority of these people are never going to smoke or vape. It is the new tech beverages that provide a microdose with a quick onset and offset, and low sugar content and are a healthier alternative to alcohol that are going to penetrate and capture this market because these consumers are used to, and comfortable with, drinking to get inebriated. And big alcohol has taken notice of this opportunity...
With Constellation Brands, Heineken, Molson/Coors, AB InBev (Labatt), Moosehead, and others investing in this space, the growth potential of cannabis infused beverages has been confirmed, and very deep pockets are now behind it. Big alcohol has the money and infrastructure (manufacturing, distribution, marketing, etc.) to push drinks onto consumers. If they can tap into the cannabis market and maintain control of their market share without having to change their 'delivery method' then it is a no brainer. Beverages will not only have a high demand from the consumer side of the equation, but will also be significantly pushed by many big alcohol brands that come onboard. These companies are experts at marketing drinkable products and creating demand from nothing. They can make consumers want something that they never even had a desire for before. Mature cannabis consumers aren’t going to be the main target market. The mass population that currently drinks alcohol and has never used cannabis or only uses it occasionally will be the target market. The goal will be to switch them over to a healthier intoxicant without having to change their habits and behaviour.
Most people that are presented with a choice between drinking option 1, which has more calories and contains poison, or option 2, which has less sugar and calories, doesn’t give you a hangover, and can actually be beneficial to the human body through the endcannabinoid system, will choose option 2. The value proposition of being able to intoxicate yourself the same way you were before but without harming your body and potentially even improving it will be exploited and heavily pushed onto consumers by big money advertising. This isn’t about getting long-time, heavy cannabis connoisseurs to switch to drinking beverages. It’s about getting the mass global population to switch from drinking poisonous alcohol.
But with that being said...as things continue to progress in this industry and a heavy user has the option to sip on a delicious tasting THC infused beverage that 1) mimics the exact same flavour as their favourite wine, beer, cocktail, or tonic beverage, 2) only has 0-30 calories and 0-6g of sugar, 3) has a small micro-dose of 2.5-5mg to keep them on a perfect level until they go back out for another joint, vape, or dab session, and 4) hits them within 5-10 minutes and dissipates in relatively the same time that alcohol does, then why wouldn’t they want to enjoy this? There is no valid, practical reason why even a heavy cannabis user wouldn’t enjoy this type of product. Some might argue price, but as economies of scale significantly grow, this will no longer be a factor.
Smokeable products, compared to drinkable products, also have a much more limited potential distribution and retail base. Restaurants, bars, sports arenas, convention centres, etc. are not going to allow people to smoke up their venues or dab in the corner of the room. For health and sanitary reasons, there is just no way that that’s going to happen.
These type of venues are all familiar and experienced with distributing/selling liquid ingestible packaged goods. This is what they are going to stick to once cannabis becomes widespread and legalized globally. They aren’t going to start selling oils, shatter, and other concentrates so that their patrons can smoke in their facility. They will sell drinks that are easily stored in their fridges or on their shelves beside their alcohol counterparts (don’t get me wrong, it is going to take years to get to this point because of both social and political roadblocks...but there is no doubt that it will get there - time is a very powerful variable and consumer demand carries a lot of weight). You will eventually see THC drinks in the same places where alcohol is served today. It is inevitable.
The powerful restaurant, bar, and pub lobby groups in North America are not going to just sit back and watch other establishments pop up that offer cannabis consumption and steal their patrons and revenue away from them. Not a chance. They are going to do everything in their power to get in on selling cannabis products and keep their clientele coming to their establishments.
And cannabis beverages will be the format that outright wins in this part of the supply chain (especially since alcohol distributors are also very, very powerful lobbyists and will want in on the money to be made too).
Likewise, as big alcohol companies continue to enter this industry in order to hold onto their market share, they aren’t going to decide to establish brand new manufacturing lines to produce concentrates or other products. They are going to stick to the equipment and resources that they already have in place, build up similar, separate infrastructure, and start producing drinks that have THC instead of alcohol so that they compete in both markets. The cost synergies are too great not to.
If there is any chance that cannabis makes its way into mainstream outlets it will be through ingestibles (and my opinion is that there is a 99.9% chance that cannabis eventually becomes just as widespread as alcohol). No idea how long it will take, but it will get there.
Edibles will have their place at unique cannabis focused restaurants and cafes, but these types of venues will be niche. You’re not going to see The Keg or Kelsey’s start selling edibles. Nor are you going to see bars and sports arenas start selling cannabis hot dogs and french fries. It’s just not going to happen. Restaurants that focus on providing high quality food to their customers aren’t going to compromise that. Cooking with cannabis would just create risk that their meals won’t taste as good and risk that they get someone too high. And venues that don’t put much focus on their food now aren’t going to start doing so when the bulk of their revenues come from alcohol. And ingesting food/candy or a mint or capsules to get intoxicated isn’t normal to a large portion of the population. It just doesn’t feel right to most people. They don’t feel as comfortable doing that as they do drinking to get inebriated. Drinking has always been socially accepted and, as I mentioned before, is ingrained in our DNA.
It also doesn’t hurt that the entire supply chain is already setup perfectly for beverages and selling a consumer packaged good takes the product liability risk away from the restaurant, bar, or sports arena. And I think that media outlets and events looking for sponsors will be more open to working with this type of cannabis product (I also believe that there is a much larger pool of influencers, such as mainstream celebrities, that will be more willing to endorse a sophisticated ingestible vs. the plant or oil by itself).
At some time in the future it will reach the point where beverages are the most widely advertised and widely available recreational cannabis product in the market, which will lead to it being one of the most widespread methods of consumption, globally.
The value proposition that comes with being able to intoxicate yourself in a refreshing way while also getting the health benefits from THC instead of the damaging consequences from alcohol is going to be absolutely enormous. This value proposition cannot be overstated.
When you think about 10+ years down the road, THC drinks are going to make alcohol become obsolete for a fairly large portion of the population. Big alcohol knows this and realizes how big of a long-term growth opportunity this is to capitalize on.
Think about how popular alcohol drinks have become over the years even though they are deadly; Literally poison to the human body. Now think about how popular THC drinks can become with the added selling feature of the health benefits to the human endocannabinoid system. Consumers don’t have to feel even the slightest ounce of negativity or regret from drinking them. They can get intoxicated while improving (or at the very least, without harming) their health. Game changing.
You have the opportunity right now to be an early investor in a transformational product that is going to drastically shift conventional intoxication and displace a very large number of alcohol drinkers. It is a ‘when’, not an ‘if’. And “when’s” lead to wealth creation if you get in early enough. Do your research, choose a horse, accumulate as many shares as possible, and hunker down for the long ride. And most of all, be patient. This is not going to happen overnight.