ASCG Month in Review: March 2018
In Case You Missed It
Alberta Enterprise Corporation recently announced an investment of $5 million into Panache Ventures; one of Alberta’s newest seed stage venture capital firms. Panache will focus on all sectors, with an emphasis on AI, cybersecurity, blockchain, VR, enterprise SaaS, and data analytics. The company is targeting a fund size of $40 million, and seeks to invest in 140 startups over four years.
If you walk into the MaRs centre innovation hub in Toronto, you will see a bustling hub of activity. The hub is home to over 200 organizations in fields spread across the sciences, business and technology. Salim Teja, president of venture services for MaRS, is originally from Edmonton. Salim, seeing the strength in Alberta, suggests the province look to the long term, which includes Edmonton and Calgary joining forces to create their own innovation corridor, similar to that of the Kitchener-Waterloo corridor.
The Board of Governors at the University of Alberta approved three separate fee hikes in a vote on March 16th, 2018. The hikes included an 3.14% increase to international students tuition, a 4% increase in residence rental rates, and a 15.8% increase in meal plan costs at Lister Centre. Students across campus have expressed their frustrations to this vote, sparking multiple protests for the first time in decades.
Donald Trump has assigned heavy tariffs of 25 per cent on steel and 10 per cent on aluminum to almost every country, except its partners in NAFTA, Canada and Mexico. News of the exemption has Canadian businesses breathing a sigh of relief, especially here in Alberta, where our economy is more trade intensive than most other provinces.
Sundial Growers Inc., a medical marijuana grower in Olds, Alberta has secured a $56 million financing deal with ATB Financial in order to accelerate the second and third phases of the company's expansion plans. By next year, the company says that it will have "the largest purpose-built indoor cannabis facility in the world” with 210,000 square feet of space.
Feature Story: Canada, Cannabis Capital of the Globe?
“Canada could be to Cannabis what France is to wine”. That’s Tokyo Smoke CEO, Alan Gertner talking about where he sees Canada positioning itself in the global cannabis market. Gertner is not alone in this assertion, as businesses across Canada are buzzing right now as the countdown to cannabis’ legalization churns closer. In Ottawa, the Canadian senate has already voted in favour of Bill C-45, The Cannabis Act, to move to the committee review stage, with a final expected vote in June. Unless there are substantive, unforeseen complications in the next few months, recreational cannabis production and consumption in Canada will be legal before the summer is up.
For Canadian businesses, the legalization of cannabis is a huge business opportunity; with market size projections at $22.6 billion for the Canadian market, and a whopping $100 billion globally. This opportunity extends throughout the entire cannabis supply chain, from producers to distributors, to retailers of the plant and other accessories. This is a fact that hasn’t been lost on Alberta, home to some of the most exciting cannabis businesses in the country. From large scale growers like Aurora Cannabis or Sundial Growers Inc, to fast growing startups like cannabis paraphernalia company, BRNT Designs, Albertan businesses are gearing up in strong fashion for this launch.
Moving forward, we chose to use this Month in Review to analyze both key trends in the cannabis market and key learnings that can be taken away from the implementation of legalized, recreational cannabis in other jurisdictions. Here’s what we found:
Clear policy is needed to differentiate between medical and retail markets: In both Colorado and Washington state, there were various challenges around competing legislation with regards to the co-existence of retail and medical markets. In both states, pre-existing standards around medical regulations created a system of dual standards (e.g., different minimum ages, purchase quantities, growth restrictions, and taxation levels). This ended up contributing to the grey market, a market where products are produced and distributed in unregulated ways that are not strictly illegal. This was especially problematic when it came to personal production, where according to Colorado's Amendment 64 for example, medically authorized individuals were able to produce up to six plants for usage amongst upto five people. The plants grown in this market posed a high risk of diversion to youth and out-of-state visitors, who were now able to access a tertiary market away from retail and black market operations. Moving forward, this example demonstrates the importance of setting clear legislation and policy differences between the medical and retail markets.
Branding will be key differentiator: When asked about the future of cannabis marketplaces, the CEO of B2B cannabis market place Leaflink made the following comments: “There are 100 people who can grow and call their product [a certain strain] and it’s very hard to differentiate from both a B2B buyer and B2C buyer [on] how that’s any different from one grower to the next,” said Smith. “But brands can have baked into them [a] mission, purpose, objective and clarity to what they’re actually selling.” This opportunity will allow top cannabis brands to produce truly world class brands akin to Coca Cola and Pepsi in the soft drink market, or Nike in athletic apparel and footwear. Companies that can produce strong brands that cater to the various tastes of different consumers will likely be able to retain customers in what will be an extremely competitive market.
Export markets represent key revenue opportunity: Currently, Canada is one of only a handful of countries that export cannabis products. As more and more countries begin to legalize either medical or recreational marijuana, Canadian producers can capitalize on the first mover advantage and be the primary supplier to these markets. One great example of this is in Germany, a country where medical marijuana was legalized just over a year ago in March of 2017. Germany found itself struggling to meet domestic demand, and actively sought out exports from other countries. Since that time, multiple Canadian growers including Canopy Growth Corporation and Cronos Group have already begun supplying into the market. Aside from Germany, other interesting export markets include Argentina and Peru, both countries where medicinal marijuana was legalized in 2017. Taken in conjunction, the market size for these two countries is approximately $338 million USD, much smaller than the Canadian market, but still a relatively substantial amount.
Supply Management will be challenge for industry come Summer 2018: When Colorado legalized pot in 2014, they almost immediately found themselves with a supply shortage, and over-inflated prices on cannabis products. While prices are down to around $11/gram right now, prices in those low supply days were almost three times as high at around $30/gram. Other US States have also had similar supply shortages, as most states have taken between 12-18 months for supply to meet demand. Many in Canada are expecting a similar situation, prompting large scale cannabis growers to ramp up capacity. Here in Alberta for example, companies like Aurora Cannabis and Sundial Growers Inc have both made large scale investments into production capacity to prep for the influx of legal pot smokers. According to polls, this influx will consist of an increase of around 22% as around a third of Canadians (34 percent) say they will at least try smoking marijuana after it becomes legal as opposed to 12 percent who smoke it recreationally now. Ensuring there is adequate supply will be an important challenge for policymakers and businesses alike to manage, especially with regards to transitioning customers away from the black market.
Legal Cannabis in Canada represents the opportunity of a lifetime for Canadian entrepreneurs, and a burgeoning source of taxable revenue for government services. Given the plethora of successful companies already in the industry, the future seems bright for Canadian cannabis. With that being said, we recognize there are some key challenges businesses and policy makers alike will have to face. This includes clearly delineating the differences between recreational and medical marijuana markets, managing the influx of domestic demand growth, creating memorable brands that retain customers, and locating viable export markets for expansion. If businesses and policy makers alike can manage these challenges, Alan Gertner's predictions about Canada’s Cannabis market being akin to french wine seem destined to come true.