This week marked the one-year anniversary since cannabis was legalised in Canada. It also marks the beginning of the ‘Cannabis 2.0’ wave of cannabis-infused products. From edibles and beverages to vaporizers, Canadians will now be exposed to a broad range of new ways to consume.
Slow to start, but no surprises
Although cannabis companies are technically able to begin selling these cannabis derivatives, few have.
This is because firms want to ensure that they meet the high safety and quality standards set in place by the Canadian government. Labrador and Newfoundland, the two easternmost provinces, have been the first to shelve stores with gummies and chocolates. After that, the selection of products has been limited.
Thus, small offerings in Ontario, New Brunswick, Nova Scotia, Alberta and British Columbia will slowly fill stores moving into 2020. This also means the slump in cannabis stocks will probably continue well into Q1 of next year.
It should also be noted that cannabis vaporizers, a crowd favourite, have been banned in Labrador, Newfoundland and Quebec. In November 2019, the U.S. Centres for Disease Control (CDC) and Prevention identified vitamin E acetate, a chemical often mixed with cannabis oil on the illegal market, as a major cause of lung disease. In Canada, there have been 14 such vape-related cases, according to the Canadian government.
Due to several factors, of which bottlenecked distribution, a low number of retailers, health issues and general lacklustre demand are primary, green gold has taken a nosedive since legalisation in 2018. Cannabis 2.0 has been a promise for many to break this trend.
But with an additional year of experience under their belts, cannabis companies are proceeding with caution.
Canopy Growth Corp., for instance, launched a soft gel product for patients and medical professionals back in 2018. The company said at that time that the product reflects ‘the growing desire for easy to use, medical cannabis products that go beyond whole-flower.’
More than a year later, this line has been chalked up as a failure according to an analyst with Raymond James Michael Freeman. ‘[Many cannabis companies] went into the market without a lot of market intelligence that led to an error in market understanding and consumer behaviour’, said Freeman. The key difference in the revival of cannabis is now less a rush for first-mover advantage, but rather a high focus on the value proposition and market fit.
The Canadian cannabis climate is, thus, tense as the industry continues to shake out unproductive companies. For the larger players still in the game, the pressure is on to deliver. In Europe, a continent that is slowly but surely entering the sector, the pace of innovation in Canada offers local entrepreneurs a critical learning opportunity.
Perfecting the craft
Recreational cannabis is still illegal within the EU but the medical and CBD markets are thriving. With Germany taking the early lead in terms of regulatory favour, other countries like France and Luxembourg are following closely behind.
In 2017, bureaucrats in Berlin legalised cannabis for medical use and saw demand skyrocket. To meet this demand, the country has opened up a tender process to bring in foreign suppliers.
This is no new news, of course, and Canadian companies have been quick to enter Europe given any possible opportunity. Aurora and Aphria, for example, were each awarded five of the thirteen lots in Germany’s tender process. In an interview with Market Watch, Aurora’s CFO Glen Ibbott said:
‘Over the last quarter, I’ve been adjusting strains under cultivation at our EU GMP facilities to better meet the needs of the European markets. We have also been growing our sales force in Germany and believe we continue to have the leading market share of natural medical cannabis.’
The reference to the guidelines for good manufacturing practices (GMP) is the critical takeaway here. No matter the size, credibility or experience of a cannabis firm, firms will always need to comply if they ever want to step foot on European soil.
Similarly, CBD producers from abroad will also need to bear in mind the novel food regulation, a unique policy that demands uncommon food products earn approval before moving to retail. Taking the time to abide by this policy has a huge bounty at the end, too. The European CBD market is one of the most lucrative with a predicted €1.7 billion market slice by 2023. Germany is forecasted to be the greatest driver of this growth.
Another issue with a rising CBD market is that uncertain regulations make it difficult to standardise quality. Dr. Marjeta Česen, a regulatory officer for Pharmahemp, a Slovenian CBD company, told Nutra Ingredients that ‘the market is full of CBD products that fall into a “grey zone” and it is obvious the demand is so high that authorities cannot follow all the companies selling such products.’
These products are primarily derivatives and range from energy drinks, protein powders and beauty creams to oils. In many ways, the CBD market in Europe is the equivalent of the recently launched cannabis derivatives market in Canada. Like Cannabis 2.0, it hinges on establishing measured doses of CBD as well as a form factor that matches consumer behaviour.
According to a dual report from researchers at the University of Bari and the University of Foggia, consumers in Europe are becoming more and more interested in ‘functional foods’ or those that ‘may provide health benefits beyond those delivered by traditional nutrients, or that the food has potential in preventing disease or in promoting a better life quality.’
Entering the wellness foods sector, which CBD is having success doing, is also incredibly risky for interested parties. This is because there is a high rate of failure ‘due to the fact that the product development is often driven by technical feasibility’, according to the report.
This indicates that, although consumer preference for wellness-centric CBD products may be high, the lack of technical execution is preventing newcomers from trying these products out. Framing this narrative around the events in Canada also applies.
The vaping crisis and the difficulty of reproducing the same cannabis-based product at scale have already done critical damage to the industry.
Too much, too soon
In many ways, the slow regulatory machine in Europe may not only be protecting consumers but also business interests. A product, no matter the category, will sell magnitudes better if it also has the backing of government agencies.
Looking back over to Canada, companies are doubling-down on researching popular products like vapes. Establishing one’s brand as a leader of perhaps the most popular derivative product would be hugely profitable. Hexo Corp., a Quebec-based cannabis company, is, thus, biding its time before launching their vapes.
In a call to investors on December 16, Sebastien St-Louis, Hexo’s chief executive said that their products will only contain ingredients found in cannabis. They are backing this up with further testing around the ‘the chemical stability of cannabinoids and terpenes (two compounds in cannabis) when atomized or vaporized’ to determine ‘if [their] compounds are degraded into potentially toxic products when atomized.’
With an unknown launch date and a premium on research, Canadian companies like Hexo realise that Cannabis 2.0 may be their last chance at digging out of the latest slump.
For those based in the EU, working outside the law may be profitable in the short term, but if entrepreneurs can learn anything from their Canadian colleagues, a regulatory crackdown is inevitable.