Canada’s legalization of adult-use and recreational marijuana celebrated its first anniversary in October, and the next phase of the market is now set in place. With regulations now developed and implemented for cannabis derivatives, such as cannabis-infused drinks, vaping concentrates, and edibles, the “Cannabis 2.0” market, as many call it, puts Canada at the forefront of a revolution and an industry brimming with potential. But not all is hunky-dory with Canadian cannabis; for now, it looks like a rocky prospect.
Lack of Retail Footprint
According to several analysts and investors, a severe shortage in cannabis retail outlets hampers the present growth of the legal marijuana industry. As a result, the illegal black market remains just as dominant.
HEXO Corporation, a Canada-based creator and distributor of cannabis-related products, has already issued a revenue warning amidst the dropping of its stocks. Investors hoping for the returns that prompted the soaring of shares to unprecedented earlier levels this year would have to wait, as the returns are not materializing as well as expected.
Treated As Illegal
Mackie Research Capital analyst Greg McLeish says that the Canadian government put up a lot of red tapes, particularly at the retail level. This excessive bureaucracy puts a lot of pressure and presents a lot of challenges to the licensed producer, making it hard to roll out products efficiently. He also considers the regulations to be a form of prohibition in the industry.
Jason Wilson, a partner in ETFMG Alternative Harvest, says that the “Cannabis 2.0” revolution will not enact any immediate change, as any company that wants to market a product would have to register with Health Canada and give a 60-day notice. It will become harder to compete will the still dominating black market without the ability to market a diverse selection of products at once.
In a lot of ways, the government is still treating the industry as illicit, says McLeish. Online customers of cannabis companies are required to sign-in and confirm they are over 19 years of age, cannabis companies are not allowed to advertise themselves anywhere, and all medicine is not taxed in Canada except for medical marijuana.
Possible Cash Shortages
McLeish recently concluded a survey of 50 cannabis companies and their cash positions and found out that 42% or 21 out of the 50 have six months or less of cash.
Some companies started with terrible capital structures but rushed to ride the cannabis wave, and now that the bubble had burst, are getting exposed. The most successful companies relative to the others are the ones who bring in and qualified management from other businesses who know how to grow and operate at scale.
The sector is growing through a “sanitation phase,” where the bad actors will get weeded out, and the competent guys will remain.
However, not all is lost. Medical marijuana is still on the rise and continues to expand.
Each household is allowed a maximum of four cannabis plants from “licensed seedlings.” You can register to produce a limited amount of medical cannabis for yourself, and get it tested by a licensed dealer. If you follow the steps to being a licensed grower, then you can grow your marijuana without purchasing from a third party supplier. Medical marijuana accounts for C$0.77 billion to C$1.79 billion of the potential C$2.6 billion to C$6.13 billion Canadian cannabis market, according to market research by Deloitte.
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There will be mistakes, missteps, and setbacks, but that is expected in a budding industry under a tight government. With time comes to experience in maneuvering the stringent regulations of the market, and the Canadian cannabis industry may be presently down, but is certainly not out.