A positive and friendly regulatory framework is some of the catalysts fuelling the burgeoning North America cannabis sector. In the U.S, a number of States have legalized cannabis for either medicinal or recreational use or both. Canada, on the other hand, became the first nation, among the exclusive G7 club, to go against the grain and legalize recreational use of the plant at the federal level.
Cannabis Legalization Drive
The legalization drive has helped affirm the cannabis sector credentials as a multi-billion industry with vast opportunities for growth. As early as in 2017, legal cannabis sales had reached record highs of $8 billion in North America.
With the legalization drive gaining momentum and more cannabis, products hitting the market legal cannabis sales could clock record highs of $35 billion by 2023. A compound annual growth of about 28%, underscores why companies are increasingly flocking and expanding their footprints into the nascent sector in pursuit of opportunities for growth.
While other countries have also legalized cannabis, mostly for medicinal use, Canada and the US top the charts, when it comes to total sales.
Cannabis sales growth in North America has everything to do with the fact that medical cannabis has been legal in Canada since 2001. California became the first State in the U.S to legalize cannabis in 1996.
U.S Cannabis Market
In the U.S 10 states have legalized recreational use of marijuana. In contrast, medicinal marijuana is legal in a total of 33 states. California boasts of the largest cannabis market in the world retail stores having sold $2.5 billion worth of cannabis products in 2018 alone.
Colorado is another burgeoning cannabis market having registered $1.5 billion worth of sales in 2018. In the state, there are more marijuana dispensaries than Starbucks and McDonald’s outlets affirming strong demand. Washington came in third on recording $1 billion worth of legal cannabis sales last year.
Cannabis sales in the U.S can only continue to increase in view of changes at the federal level. The passing of the 2018 Farm Bill has removed Hemp from the list of ‘schedule one’ substances. With the new bill, the ability to transport and sell hemp infused products across all the 50 states should lead to massive growth opportunities for U.S Companies.
Another factor poised to spur growth in the US cannabis market is the spread of legalization and regulation. While a no match to Canada, each year has seen an increase in the number of states where cannabis is legal to be it for medicinal or recreational use.
According to Cowen Research group, Connecticut, Rhode Island and New York could soon join the likes of Nevada, California, and Washington on legalizing marijuana for medicinal purposes. With each legalization, the size of the cannabis market should grow.
The fact that 66% of Americans support nationwide cannabis legalization fuels the prospects of further expansion of the U.S Cannabis market.
With the legalization of pot in more states, the cannabis sector could be worth $80 billion by 2030 according to a study by vie Cowen Inc.
The growth will not only be in the cannabis sector but will also spill over to another sector from energy to packaging as well as point of sale technology whose products are used in the production and sale of pot products.
Canada Cannabis Market
The Canadian cannabis industry was the center of attention in 2018, as Canada became the first country to legalize recreational use of marijuana at the federal level. With both recreational and medicinal use fully entrenched in the constitution, the Canadian Cannabis market could hit highs of $6.8 billion according to initial estimates.
In the wake of full cannabis legalization, CIBC expects Canadians to consume as much as 800,000 kilograms of pot a year. With increased consumption provincial governments could end up with as CA$3 billion in earned profits and taxes.
Deloitte on its part predicts that the Canadian recreational market could reach highs of CA$8.7 billion a year.
While Canada’s cannabis sales look like a shadow of California total sales, one must factor in the population size of the two markets. Canada has a population of about 37 million people, which is about a tenth of the U.S.
Given the small population, the Canadian cannabis market could struggle with significant oversupplies given the ever-growing number of entities engaging in the cultivation and production of cannabis products
Cannabis oversupplies could result in a reduction in cannabis products prices in Canada a challenge that some States in the U.S are grappling with. To survive the onslaught, Canadian companies may have to venture into the export business, as a way of finding market to their produce.
U.S vs. Canada Cannabis Market
Regulation
While Canada boasts of an edge when it comes to laws and regulations governing Cannabis, it’s market size is a no match to the U.S cannabis market. As it stands, the U.S will continue to account for a huge chunk of the total cannabis sales in North America in part because of the big population size that acts as an ideal addressable market.
In addition, the U.S Cannabis market is likely to outperform its Canadian peers in part because of some friendly regulations as well as a friendly environment that support growth in the sector. Unlike their Canadian counterparts, U.S companies can operate vertically integrated operations with strong margin retention. In contrast, Canadian retailers must procure all their products from the government-run wholesalers.
Restrictions on the number of cannabis retailers one can operate on the provincial level is another tailwind that could clobber growth in the Canadian cannabis sector. For instance, Provincial governments are tasked with the responsibility of procuring cannabis from licensed producers and then act as wholesalers for retailers.
Slowing Sales
Recreational pot sales in Canada have not lived up to expectations; another indication of a potential slowdown. Released data indicate that the initial buzz in the Canadian cannabis market might be wearing off.
Data published by Statistics Canada indicate that legal cannabis sales shrunk to $39.7 million in January compared to $41.58 million registered in December. One of the factors attributed to the slowdown are packaging issues that left many stores unprepared.
Health Canada has tabled a list of requirements right from packaging warnings as well as labeling requirements that companies must adhere to before getting their products to market.
U.S Cannabis Market Tailwinds
The U.S Cannabis market also continues to struggle with its fair share of issues stemming from the fact that Marijuana is a banned substance under federal laws. With the restriction, national banks have continued to shun the sector on fear of getting reprimanded by the Federal government.
With banks shunning the sector, cannabis companies, as well as people, are struggling to secure loans as well as lines of credit to launch or strengthen operations in the multi-billion industry. The federal ban also leads to complications on leasing as well as contracting, insurance among other things, something that continues to cripple expansion of the sector.
Bottom Line
Canada boasts of an edge over the US, given its full recreational use legalization. The legalization drive has essentially opened the market as companies can now target a broader target market both on the medicinal and recreational front.
The Canadian cannabis market is still in the early stages of development as companies are increasingly setting up cultivation and production facilities. In the future, there is a likelihood that cannabis supply will exceed demand given the country’s small population compared to the U.S.
With that in mind, Canadian cannabis market is likely to continue playing second fiddle to the U.S, when it comes to actual cannabis products sales.
The fact that the federal government treats cannabis as a banned substance has essentially made it impossible for companies and people to engage in multi-state operations in the U.S. Amidst the headwind, the cannabis market has continued to grow at an impressive rate thanks to legalization in a number of States
Given that more states are on course to legalize the use of marijuana for both medicinal and recreational purposes, the sheer size of the market is likely to hit record levels. Population size means the U.S cannabis market will always have an edge over Canada when it comes to the total revenues generated from legal cannabis sales.
The U.S has a lot to gain should it decide to follow Canada and legalize Cannabis, at the federal level, for both medicinal and recreational use. Such a move would allow companies to operate across state lines.
Full pot legalization would also go a long way in eliminating unnecessary costs that come into being such as incarceration people for handling something legal in other states. Full legalization will also lead to more transparency and safety in the purchase of cannabis.
So, that said, where are you investing? Canada OR the USA?
