On the 11th of November, 2019, Marijuana Business Daily reported that Italy had cancelled one of Aurora Cannabis’ three grow lots, which it won in July of this year. The Ministry of Defense said that the third lot, which would have grown 40 kilograms of high-CBD cannabis, was ‘not necessary’.
Although the crop might not appear substantial, the Canadian cannabis company has, as of late, been in dire search of new vendors in Europe. But why exactly are cannabis suppliers from Canada in need of European markets and vendors from Europe?
Capitalising on first-mover advantage
Since it legalised the sale and manufacture of recreational cannabis in 2018, Canada has quickly taken the lead as a formidable global marijuana supplier.
Within the country, the first year was met with a swell of demand which caused strain for local suppliers. Headlines indicating that Canada’s cannabis supply ‘was not even close to meeting demand’ emerged. Thus, the companies that eventually solved this need a year later were handsomely rewarded.
Aurora Cannabis (ACB) stock activity from 2017 and beyond.
Prominent firms like Canopy Growth Corp., Aurora Cannabis and Aphria, for example, now command multi-millions in revenue due to the favourable legislation in the country. With fewer regulatory hurdles to navigate, this trio of companies was able to build out the necessary infrastructure much like any other business.
In a Fortune article on the same subject, Pierre Debs, Canopy Growth Corp.’s European chief, said that ‘[t]he Canadian legislative situation has given Canadian companies a big advantage over those based in countries with more restrictive cannabis laws, especially when it comes to accessing capital markets.’
Put otherwise, companies unfettered by regulatory barriers are able to raise capital from public markets and then simply point those resources back at building a business. And, as far as the adage goes, spending money wisely invariably leads to even more money. Canopy, for example, has already bought a Spanish marijuana manufacturer, a British wellness firm and a German medicinal cannabis company in 2019.
For its part, Aurora has also begun infiltrating the European market by purchasing a majority stake in Gaia Pharma in Portugal, winning a coveted cannabis tender in Germany and selling cannabis oils in the UK.
If it wasn’t already clear, this is what first-mover advantage looks like. So far, only Canadian companies have the ability to gather the resources to build out top-of-the-line growing facilities that meet high federal standards. European countries, even the most permissive, are still bogged down by the negative politics of cannabis.
But, as Jamie Shau, a research manager at the cannabis-centric analyst house Brightfield Group, indicated, Canada ‘is only going to have this [advantage] once’. Thus, the sense of urgency to expand faster than global regulations is the current strategy for Canadian cannabis businesses. As soon as cannabis is legalised elsewhere, Canadian companies will be met by stiff competition if not ousted completely.
Expansion or extinction of Canadian cannabis
Beneath the cannabis boom narrative is another story. Consider the recent events in Italy, during which the Ministry of Defense declared one of Aurora’s recent tenders to be unnecessary. The company is still allowed to grow 320 kilograms of high-THC cannabis on lot one and another, mixed, 40 kilograms grow of THC and CBD cannabis on lot two. To lose a small yield of 40 kilograms of high-CBD cannabis, therefore, might appear meaningless.
Still, one must consider that every bit helps when demand is high. Estimates suggest that there are 30,000 Italian medical patients who need roughly 1,000 kilograms of marijuana a year.
So, why drop support for high-quality products in such a demanding market? It should also be noted that the recent launch of Italian tenders was due to the inability to service all medical patients.
To justify the move, the Minister of Defense explained that the Stabilimento Chimico Farmaceutico di Firenze (SCFF), Italy’s pharmaceutical regulator, will be bumping up local production to meet medical patients’ needs. To aid in this transition is Bedrocan, a producer from Holland which has been helping the Italian government since 2017.
This, certainly, isn’t a lethal blow to Aurora, as the company will continue to have a strong presence in the country. But it does indicate a growing awareness among certain European leaders as to the benefits of a homegrown cannabis industry. The European CBD market alone is projected to hit €1.54 billion by 2023, with Brightfield Group having predicted another €7.2 billion for the entire medical marijuana sector. These are handsome sums, which, at the moment, are going primarily to companies outside of the EU.
And herein lies one of the greater questions in the cannabis industry: What happens to Canadian suppliers once the rest of the world legalises marijuana? What happens after first-mover advantage has been fully exercised?
Outside of expanding to South Africa’s, Uruguay’s, Jamaica’s or one of the various other countries’ medical markets around the globe, Brett Wilson, the chairman of Canoe Financial and a major investor in Canadian cannabis companies, indicated that the number of consumers was grossly underestimated. Wilson, like many others, suspected that consumer demand had yet to truly reveal itself.
In 2018, Wilson said, optimistically, that ‘[g]overnment forecasts [before legalisation] were five, six, seven billion [CAD]. Kind of in line with wine, kind of in line with liquor. I think it’s two or three times that size. I mean, my dog is on it now and he craves it.’
While his comments may have held true in the early days of cannabis legalisation, the scene is panning out much differently a year later.
Canadians demanding cannabis supply
The extreme demands of Canadian consumers birthed tons of small, medium, and large cannabis producers. Although the licensing process was cumbersome, there appeared to be such a need for even more marijuana products that everyone could price in whatever legal costs were necessary and still enjoy healthy profits.
The above shows the steady increase in supply and a relatively flat line in pot sales since legalisation in Canada.
Since the legalisation of marijuana in Canada, suppliers have saturated the market. This, in turn, has pushed the price of crops down as supply outweighs demand, and it has inevitably weeded out smaller suppliers who can’t compete. Large firms like Aurora and Canopy are likely well aware of this.
The two are so well-funded that they can continue to invest in more acreage, continue to lower the prices and potentially drive buyers to only buy their product. While this may appear to be a sound business strategy, assuming one can afford to do it, cannabis stocks took a nosedive at the beginning of the year because of it. Aurora, perhaps the most widely-held stock in the sector, dropped from €8 a share in March 2019 down to €3.59 at the time of press.
The Canadian Broadcast Company (CBC) reported on the 12th of November, 2019, that Cronos Group Inc., another heavyweight in the Canadian cannabis space fell short of expectations. ‘Cronos Group Inc. fell short of quarterly revenue estimates on Tuesday, as the Canadian producer’s revenue per gram of cannabis sold fell in a market suffering from surplus supply.’
This is precisely why so many Canadian cannabis firms are streamlining their international strategy. Unfortunately, the rest of the world is made up of a patchwork of esoteric laws, licensing, and bureaucratic difficulties. Indeed, offloading this surplus to European markets is now looking like a slightly slower process than predicted.
That being said, the companies mentioned above have still found ways of entering the EU by purchasing various businesses in the supply chain. The popularity of medical cannabis and cannabis-based beauty products has also given Canadian growers a foothold on the continent for the time being. But, as much power as the established names in cannabis have, regulators, like those in Italy, appear like a canary in the coal mine.
If Europe doesn’t open itself to the robust suppliers in North America, even the cannabis empire of Aurora could face serious challenges in the future. Several European cannabis suppliers are also eagerly waiting at the sideline for any favourable change in legislation. And, if one has learned anything about the move from the legalisation of medicinal marijuana to recreational, they may not have to wait for long.