Cannabis legalization growing globally
There has been a growing call around the world to legalize cannabis for medicinal and recreational purposes. The Netherlands decriminalised cannabis use in 1953, and since about the mid-1970s, cannabis has been available in select Dutch coffeeshops for personal use. There are of course restrictions on who it can be sold to and how much an individual can consume or carry for “personal use”. In 2013, Uruguay became the first country to legalize cannabis for adult recreational use. In 2017, Germany legalized the use of cannabis for medicinal purposes. Canada, which legalized medical usage of cannabis in 2001, took the major step of legalizing cannabis for adult recreational purposes in October 2018. In countries such as Spain, cannabis products are available in designated clubs.
More and more countries around the world are examining the implications of legalizing cannabis for medical and recreational purposes. This is why there is growing interest among consumer companies as well as among funds that are investing in start-ups targeting different sections of the cannabis value chain. The current market for cannabis (legal plus illegal) is estimated to be US$150 billion. (source). Estimates suggest that by 2022, the worldwide market for legal cannabis could touch US$32 billion. (source). As more countries legalize medicinal or recreational use of cannabis, the huge gap between the legal and illegal markets will inexorably shrink. As more industries innovate products around cannabis and its extracts, the legal cannabis market will grow rapidly.
The USA will remain the dominant market for legal cannabis in the foreseeable future
Despite federal prohibition on cannabis, the US is already a major market for legalized cannabis. 33 states have a program in place for medical use of cannabis, while 10 states have legalized cannabis for adult recreational use. With more states likely to follow suit and growing prospects of an end to federal prohibition, the US will remain a dominant market for cannabis. The sixth edition of The State of Legal Marijuana Markets report by Arcview Market Research in partnership with BDS Analytics estimates that the legal cannabis market in the US, which stood at around US$8.5 billion in 2017, grew to US$11 billion in 2018 (a 30% growth), and is expected to cross US$23 billion by 2022. As other countries legalize cannabis, the US will see its share of the global market declining from 85% in 2018 to about 73% by 2022. Even so, it will remain the dominant market. (Source)
Europe too is a significant market for cannabis. According to the second edition of the European Cannabis Report produced by London-based advisory group Prohibition Partners, 12% of the continent’s residents are “irregular and intensive” cannabis consumers. The report estimates that Europe’s annual cannabis market will touch 56.2 billion Euros, of which medical use will account for about 35.7 billion Euros. (source)
Not surprisingly, investments in M&A and new ventures in the cannabis space have soared in the past year or two. Viridian Capital Advisors estimates that in 2018, investment activity in the cannabis sector stood at US$13.8 billion (a 3.8X jump from the US$3.6 billion investments in 2017). Source
So where are the “cannabiz” opportunities?
Broadly, opportunities in the cannabis space exist in the seeds breeding, cultivation and extraction phases (the so-called “plant touching” businesses) as well as in the downstream businesses that involve creation of concentrates, edibles, drugs etc. (the so-called “ancillaries” segment). Specifically, extraction of cannabidiol (CBD) is a major opportunity because this is a key chemical present in cannabis that has medicinal value. Recreational use too may require consumers to be targeted with products such as edibles or vaporizers infused with cannabidiol and other cannabis extracts. Therefore, there are also opportunities around dispensing, supply chain management, ag-tech, Point-of-Sale solutions etc.
Reports indicate that there are already 28,000-32,000 cannabis related businesses in the United States alone. (source). As the sector opens up, there will be a wave of M&A and industry consolidation.
Who is best positioned to capitalize on the opportunities?
The WHO Expert Committee on Drug Dependence (ECDD) has concluded that cannabidiol in its pure state “does not appear to have abuse potential or cause harm“. This is a major factor that can drive growth for companies with cannabis products in their portfolio because there is growing awareness around the world about the harmful effects of various ingredients used in FMCG products that have been mainstream for several decades. An example is the continued fall in sale of soft fizzy drinks. Water infused with CBD is being sold in the UK, USA and Canada- a trend that is expected to gather momentum globally. Even the beer industry is looking at ways to leverage cannabis. Constellation brand, which owns the popular Corona beer brand has reportedly invested US$4 billion into Canopy Growth, Canada’s top cannabis producer. This is believed to be one of the largest investments in the cannabis industry; similar deals may well follow.
Given the nature of the product, building trust with consumers will be vital for sustained success. Trust will be especially critical in the Extraction and Manufacturing segments of the value chain. This puts consumer companies with existing trusted brands at a relative advantage. Such companies include pharmaceutical, nutraceutical as well as FMCG/CPG companies. These players are also at an advantage because they already have in place stringent manufacturing and quality control processes including traceability. But just as important is access to top-quality cannabis plants, so that the extracts are pure and supplies are secured and sustainable.
Cannabis has several chemical compounds that may be useful for skincare and cosmetics companies. Indeed, companies such as Estee Lauder and Milk Makeup have already launched beauty products that contain cannabis extracts.
Tobacco companies understand the restrictive regulatory and taxation requirements placed on cultivation, production and distribution better than any other set of companies. These companies are thus well-positioned to innovate cannabis-based products that wean tobacco smokers away from cigarettes and cigars to cannabis-based vaporizers etc.
But innovation is a great leveller of playing fields. Given the reports of cannabidiol playing a role in alleviating anxiety, reducing stress, fighting inflammation and pain and even treating depression, there is significant first-mover advantage to be gained by companies that move to occupy this space and position themselves suitably.
From startups to MNCs, consumer companies are in the race to get ahead in the rapidly-developing cannabis- related business spaces. The field is wide open, with players from different segments looking to enter this space based on their respective strengths. Given that cannabis will remain a regulated business, players across the value chain will need to comply with stringent legal and regulatory requirements. Companies with a conscious strategy to include cannabis into their portfolios will clearly have an edge. Their strategy should not just be about innovative products or packaging or pricing. Companies looking to gain a foothold in this lucrative space must move quickly to have teams with the right expertise in the right markets; only then can they monetize their early-mover advantage better than those who come to the party later.