Canadian Cannabis Market Analysis: New Legislation

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Canadian Cannabis Market Analysis: New Legislation

Prime Minister Justin Trudeau and the Canadian government plan to legalize the recreational use of cannabis in Canada by July 2018. This policy is predicted to have an enormous effect on the cannabis market in Canada, and many companies are now trying to cash in on the so-called "green rush".

Our findings indicate the market is likely expand between $4.9 billion and $8.7 billion from its current valuation of $316 million for medicinal cannabis. Major players in the market are likely to include Canopy Growth Corp, Aurora Cannabis Inc., Aphria Inc., Supreme Pharmaceuticals, OrganiGram holdings, Emblem Corp., CanniMed Therapeutics Inc., Cronos Group Inc., Emerald Health Therapeutics Inc., THC Biomed International, and Newstrike Resources. Existing competitors in the medicinal marijuana space are likely to benefit from first mover advantage in transitioning to the legal recreational marijuana industry. In addition to these existing supply channels, nearly one quarter of Canadians report that a pharmacy is their preferred retail channel for legal recreational cannabis. Although we did not identify extensive information regarding market gaps, our findings indicate that the legality of marijuana lounges throughout Canada will remain a concern.

While we were unable to determine a demographic profile for legal recreational cannabis users in Canada, we did pull together some key insights on this topic. While the actual number and demographics of Canadian cannabis users is unlikely to be dramatically affected by the legalization, if the precedent set by states in the United States is any indication, the largest target market for companies selling legal cannabis will be those who already use it. Key demographics for this group indicate that cannabis users are more likely to be men in the millennial age group, and they primarily use cannabis to promote relaxation and sleep. Below you will find a detailed discussion of each of these topics.

Market size

A comprehensive and widely cited financial analysis of the legalization of recreational cannabis in Canada estimates that legislation permitting the recreational use of cannabis in Canada would lead to revenues of $4.9 billion and $8.7 billion. A more conservative forecast from the Canadian Parliamentary Budget Officer (PBO) projects that the legal recreational cannabis market will be worth between $4.2 billion and $6.2 billion in its first year. In considering both forecasts, it is noted that these revenue estimates represent a significant increase from the current market value of legal medicinal cannabis in Canada, which is $316 million.

However, neither estimate represents a substantial increase from the existing Canadian illegal cannabis consumption market, which was valued at $5.7 billion in 2016. In fact, the Canadian Parliamentary Budget Officer's estimate that the recreational cannabis market will generate revenues worth a minimum of $4.2 billion suggests that legalized cannabis will be less valuable than illegal cannabis products. Therefore, it can be concluded that much of the growth in the legal recreational cannabis market will likely be attributed to existing cannabis users making legal purchases to the exclusion of illegal products, rather than a dramatic increase in the total number of new cannabis users.

The ancillary market for recreational cannabis in Canada includes growers, testing labs, and security. The impact of legalization on the ancillary market is estimated to generate revenues between $12.7 billion and $22.6 billion. Moreover, financial analysis indicates that even beyond 2021, the Compound Annual Growth Rate (CAGR) for the legal cannabis market is expected to exceed 20%. All the growth in the ancillary market can be directly attributed to the legalization of recreational cannabis, since legalization is a necessary precursor for growth in this market.

Existing competitors and major players

Major players poised to take advantage of the legal recreational cannabis industry in Canada are Canopy Growth Corp, Aurora Cannabis Inc., Aphria Inc., Supreme Pharmaceuticals, OrganiGram holdings, Emblem Corp., CanniMed Therapeutics Inc., Cronos Group Inc., Emerald Health Therapeutics Inc., THC Biomed International, and Newstrike Resources. The legalization of recreational cannabis is expected to have a significant impact on all of these existing competitors who choose to enter the recreational cannabis market, due to first mover advantage. As a result, they are likely to experience a more efficient transition to the legal recreational space. Additionally, existing competitors already have supplier and distribution networks in place that can be tapped to provide recreational cannabis products. Finally, existing suppliers are already familiar the high level of regulation within the industry and capable of demonstrating compliance. As a result of these considerations, it is likely that existing competitors in the medicinal cannabis space in Canada will experience significant growth if they elect to expand into the recreational space.

Consumers

At the moment, only 22% of the Canadian population uses cannabis. As the current population of Canada is 36,874,091, this indicates that there are 8,112,300 cannabis users in Canada in April 2018 (36874091 * 0.22). However, 17% of Canadians who do not currently use cannabis have indicated that they might experiment with marijuana if it is legalized, which represents a sizable potential market. If all 17% of Canadians who have expressed an interest in using legalized cannabis actually do so, we can estimate there will be an additional 6,268,585 Canadians who use legalized marijuana at least once following legalization (36874091 * 0.17).

However, it is difficult to determine what portion of this population will actually become regular cannabis users following legalization. This is the primary uncertainty in market size calculations. While it is difficult to predict changing consumer demographics in Canada, we can evaluate the impact of legalization of cannabis for recreational purposes in several American states that have already legalized recreational marijuana. A study of the impact of legalization in Colorado, Washington, Oregon, and Alaska found that while many existing users switched to legal cannabis, the use of cannabis among consumers increased at about the same rate as it had before legalization. Additionally, usage increased among roughly the same demographics. If this trends holds true for Canada as well, then the key consumer groups to consider when predicting demographics for legal cannabis purchasers in Canada are the current consumers of illegal cannabis.

Despite exhaustively researching consumer demographics, we found that there are no reports analyzing the change legalization will have on cannabis users. As a result, evaluating usage trends among current illegal cannabis users may be the only strategy for determining the expected demographics of the cannabis market post-legalization in Canada. Among cannabis users in Canada now, there is near total gender parity. It is estimated that 23% of men used cannabis at least occasionally, compared with 21% of women. By age group, it is estimated that 33% of millennials use cannabis at least sometimes, compared with 23% of Generation X, but only 14% of Baby Boomers. The top reasons Canadians use cannabis are for relaxation and sleep (51% of users), reducing stress (49%), having fun with friends (35%), improving mood (33%), and making activities more interesting (30%). Moreover, only 20% of Canadian cannabis users accompany their cannabis with alcohol all or most of the time. In comparison, 55% of current users who imbibe with alcohol do so only occasionally or rarely, and 25% of users never use the two products together.

Retail channels

As already noted, companies which are already selling legal cannabis have a big first mover advantage, because they already have established supply networks. However, they also have another advantage, which is established retail channels, particularly since pharmacies are likely to remain the most popular place for Canadians to obtain legal cannabis. Indeed, 24.7% of Canadians say their most preferred retail channel for legal cannabis is a pharmacy, compared with 17.9% who prefer privately owned cannabis retailers, 17.6% who favor new government owned retailers, 16.3% who want it to be sold through existing government owned liquor retailers, 11.9% who prefer existing privately owned liquor retailers, and 11.7% who prefer grocery stores or supermarkets.

Market gaps

The form that the legislation will take is not yet fully certain, and moreover, implementation will be different in each Canadian province. As a result, we could not predict which market gaps will or will not exist. However, we identified some key insights regarding this topic. One major component of the market which is still under consideration and will be affected differently in each province is the legal status of marijuana lounges. These lounges are currently popular across Canada, although they currently operate in a "gray market" of legality. Under current plans, many provinces will leave such lounges illegal. Ontario is currently considering legalizing them during the implementation of the broader cannabis legalization, but this topic remains undecided at this time. This has the potential to leave a major gap in the recreational cannabis market, as it is akin to legalizing alcohol while still prohibiting bars.

Conclusion

The forthcoming legalization of recreational cannabis in Canada is set to have a major impact on the market. The market is projected to grow from $316 million for the current medicinal marijuana industry to generate revenues between $4.9 billion and $8.7 billion. Major players in the market are likely to include Canopy Growth Corp, Aurora Cannabis Inc., Aphria Inc., Supreme Pharmaceuticals, OrganiGram holdings, Emblem Corp., CanniMed Therapeutics Inc., Cronos Group Inc., Emerald Health Therapeutics Inc., THC Biomed International, and Newstrike Resources, and for existing competitors in the medicinal marijuana market, they are likely to have a significant first mover advantage. Nearly one quarter of Canadians report that a pharmacy is their preferred retail channel for legal recreational cannabis, and legal cannabis users are likely to have the same demographics as current cannabis users, including being more likely to be male, in the millennial age group, and using cannabis for relaxation and sleep.
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