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Friends,
After a disappointing beginning to federally legal adult-use in Canada, the cannabis market there is about to get better. Already, retail stores are becoming more abundant in Alberta, and we are likely to see more progress in other provinces this year, especially in Ontario. Of course, another big change is the introduction of new types of products that are already quite common on the illicit market, like vape pens and edibles. For the first year, the main products available were dried flower and pre-rolls, but this has now changed.
While we think the new products are going to help improve industry revenue, we are cautious for a number of reasons. The biggest disappointment is that vape pens won’t be available in Alberta and Quebec as well as in the smaller Newfoundland & Labrador. In U.S. markets and presumably in the illicit market in Canada, this is one of the largest categories, and its absence will hinder near-term success. Hopefully the provinces reconsider the restriction later this year.
We think edibles are another important category, but we are concerned that packaging limitations are going to stunt the early success. In the U.S. markets with state-legal cannabis, packages tend to be capped at 100mg, with Oregon, at just 50mg, an exception. The Canadian market restricts THC to 10mg per package, which is terribly uneconomical in our view. Early indications are that edibles will cost C$7-8 (or US$6), making the per mg serving about 2-3X the cost typically in the U.S. Adding to our concern is that Quebec has effectively banned edibles, with no chocolates or candies.
The final concern is that several companies are counting on cannabis beverages to be a hit, and we think that this category is likely to disappoint. First, in the U.S., beverages have never been a popular product in any market. Better products, including features like taste-masking and predictable onset, could help, but we think the cost will be too prohibitive. Until cannabis beverages can be enjoyed in restaurants and lounges, we expect they won’t be too popular with consumers, even with the product improvements.
While we are cautious on the pace of adoption of new products, we do expect a lot of novelty buyers at the outset. Hopefully, provinces are quick to permit sale of vape pens and will remove some of the other restrictions on the types of products that can be sold. Additionally, we think it’s important for the 10mg per package cap to be removed, a step that would likely lead to a more robust market for edibles. Concern about its near-term potential, in our view, is warranted, but the good news as 2.0 launches is that expectations seem quite muted.
With no direct involvement with the cannabis plant, KushCo Holdings has positioned itself as a leading producer of ancillary products and services for the legal cannabis and CBD industries. The company will report their financials this week and has scheduled a conference call for January 8th after the market closes to discuss the results from its fiscal year 2020 Q1.
Get up to speed by visiting the KushCo Holdings Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
- Exclusive: 5 Leading Publicly Traded Cannabis Companies Report Substantial Revenue in December
- Exclusive: American Cannabis Operator Index Declines 2.2% in December
- Exclusive: Canadian Cannabis Licensed Producer Index Ends 2019 Down 44%
- Exclusive: Global Cannabis Stocks Close Out Challenging Year with 1.1% Gain in December
- Harvest Health to Buy MJardin Nevada Cultivation Facility for $35 Million
- TerrAscend Closes First $24 Million of Upsized $30 million Unit Private Placement
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Sincerely,
Alan & Joel
