Canada / Analyst Insights
Potential Competitors in a North American Cannabis Market

What information do you want to see from IBISWorld on COVID-19? We'd love to hear from you

by Ediz Ozelkan Analyst
Dec 04 2018

In the wake of a court case that deemed marijuana prohibition unconstitutional and with a majority in both houses of the Mexican congress, the soon-to-be minister of interior, Olga Sanchez Cordero, introduced a marijuana legalization bill to the senate in early November. This bill could sow the seeds for cannabis production in the country and in turn, create a consolidated cannabis bloc in North America that excludes its largest economic power. In a burgeoning global market, which the Bank of Montreal expects to reach nearly $200.0 billion by 2025, according to a recently released report, how can the United States adapt in the long run? Canada is the first G7 nation to legalize recreational marijuana. The domestic industry’s efforts to nourish the soil of its competitive landscape is a harbinger of what can happen elsewhere.

Canada opened its recreational cannabis market on October 17th of this year, becoming the second country in the world to do so after Uruguay, whereas the United States has languidly moved toward decriminalization on a state-by-state basis. Medical marijuana has been legal in Canada since 2001 with a supplier monopoly. In 2013, following the passage of the Marihuana for Medical Purposes Regulations (MMPR), an influx of new companies entered the fray. Since then, Canada has positioned itself as a global leader in medical marijuana exports. The number of operators in the Cannabis Production industry in Canada (IBISWorld report 11141CA) is expected to skyrocket from one producer in 2012 to six producers in 2013 and 120 businesses in 2018 through 133 licensed production facilities. Consequently, revenue for the industry is projected to rise quickly, growing nearly 5000.0% over the five years to 2018 from $18.6 million to an estimated $916.6 million. Despite only six weeks of legal recreational cannabis consumption nationwide, IBISWorld expects industry revenue to rise 111.0% this year alone, as the cannabis market takes root.

cannabis 1

Growing pains

A bullish outlook notwithstanding, the industry is still in its infancy and suffering from growing pains. A supply shortage is the chief concern and should serve as a lesson for other countries looking to establish cannabis production capabilities. Since legalization, many retail outlets nationwide had to remove numerous products from their shelves. For example, in Quebec, after more than 12,000 in-store transactions and 30,000 online orders on the first day, the provincial cannabis board had to limit purchases to a select few products. A more dramatic illustration is a dispensary in Winnipeg, MB which had to close its doors mere hours after its inaugural opening due to high demand. This issue is multidimensional, with pressures for newly licensed producers and established operators alike.

First and foremost, cannabis cultivation, curing and processing takes time. Most growers were uncertain about legalization before they ramped up capacity. While most companies were fairly certain of the bill’s passing by early 2018, that conviction was a little too late.  Also, Health Canada still needs to approve new producers and retailers. As of October, there were only 132 licensed production facilities (69 in ON, 30 in BC and 11 in QC) and Health Canada has stated that there is a backlog of over 700 applications that need to be processed, a number which has likely grown since Health Canada’s statement on the matter in August. In the same vein, access to capital has been difficult due to the uncertainty of the application process and the lack of data for banks to rely on to dole out loans. While publicly traded companies such as Aurora Cannabis, Canopy Growth Corporation and Aphria Inc. can rely on the sale of stock, private companies’ funding efforts are limited.

The supply shortage that currently characterizes the industry will take years to alleviate completely, but consumer and medical demand is expected to support the industry as it catches up. More importantly, as demand grows, companies can dedicate more resources to research and development, introducing new consumer products and improving medical cannabis treatments to reverse the scourge of unprofitability that has been a key characteristic of the industry in its nascent stages. Ultimately, a string of legal developments fertilized the growth potential of the cannabis industry in Canada in recent years. Still, while these developments are spread across a five-year period, the uncertainty surrounding outright legalization created a supply shortage alongside an industry landscape that is bereft of operators to fully satisfy its flowering market. The federal government needs to work on expediting its application process to catch up to overwhelming demand. Accordingly, if another country follows suit, this is something that needs to be addressed. As an agricultural product, cultivation and processing takes time. If this is coupled with a long wait time for licensed production, that country’s administration needs to outline its desire to legalize cannabis at least two years ahead of its implementation. This would provide time to give out licences, secure funding, craft a distribution and retail network and make sure that there is product on the shelves to satisfy domestic and international demand.

North American cannabis consortium

The bill that Sanchez Cordero introduced this month includes the production of cannabis for commercial, medical and recreational use while also permitting individuals to grow up to 20 cannabis plants for personal consumption with a permit. With a majority in both houses of congress and a left-leaning president elect that is open to considering such legislation, a landmark bill may come to fruition soon. If two thirds of the North American Free Trade (NAFTA) (and the future United States-Mexico-Canada Agreement (USMCA)) ratify measures to legalize marijuana consumption and production, the United States is bound to take notice. How can Canada’s current industry landscape inform legalization efforts worldwide?

If Mexico passes this legislation, it will put a lot of pressure on US lawmakers, so US companies do not fall behind in the cultivation of the North American and by extension, global cannabis market. This is a prime opportunity to develop a cannabis infrastructure in North America before other nations begin their own production. Aurora Cannabis, a global leader in cannabis production based in Edmonton, AB, has expanded into Denmark through its Aurora Nordic subsidiary where production capacity is projected to reach 120,000 kilograms a year, making the company the largest company in Canada and in Europe. This head start will have long term ramifications for these pioneering enterprises, helping to cement a global supply chain that can satisfy demand for medical marijuana worldwide and recreational cannabis among nations that plan on legalizing in the future. If the world continues on its gradual progression toward potential legalization in either the medical or recreational markets, Canadian companies will be well positioned to capitalize on these developments. In contrast, if US states continue their path of legalization one by one, it would inhibit a proper network of production and distribution that could displace Canadian and potential Mexican providers who would have a head start in nationwide infrastructure development in the long run.

cannabis 2

A North American cannabis bloc

Even in its infancy, Canadian companies are already supplying medical marijuana worldwide to regions as far flung as South America, Australia and Europe. North America can become the epicenter of marijuana cultivation globally, even if Mexico enters the fray, armed with a much more hospitable climate for cannabis production, geographically and economically through lower labor costs. The layout of the North American automotive sector may offer an analogous trajectory, assuming the eventual legalization of cannabis in Mexico and the United States. Automotive production has largely been centralized in NAFTA countries based on labor cost advantages and logistics capabilities. Over time, the US-centric automotive sector was displaced by a more comprehensive supply chain that has emphasized a bifurcation between value-added products such as higher margin truck and SUV production in the United States and Canada and lower margin passenger vehicle production in Mexico. Toyota’s planned relocation of its Camry production line from Ontario to Mexico is a prime example. This could be the fate of the North American cannabis consortium, with value-added cannabis derivatives and technologically advanced medical cannabis treatment production centralized in Canada, while lower margin dried cannabis production remains south of the border. The United States can fit squarely between the two as it has in the automotive sector. Since operators in the Medical and Recreational Marijuana Growing industry in the United States (IBISWorld report OD4141) are very profitable, especially compared with the consistent operating losses recorded among Canadian companies as they focus on long term capital investments, opportunities abound for potential US legalization to supplement Canadian and Mexican production in the future.

Edited by Emily Lidstone