Taking the Next Step

Illustration by Sara Wong

By Allan Britnell

October 17 has arrived. Here’s how to flourish in a legal cannabis world.

Over the last couple of years, cannabis producers have been busy hiring staff, building production facilities, testing product, scrutinizing regulations and generally getting ready for legalization day. While there are still a lot of questions around who will buy and how best to get cannabis into people’s hands, all those long hours companies have been putting in will finally bear some fruit. But then what?

Indeed, legalization day was not the end of the road – it was just the beginning. Companies now must engage in the long-term, complex task of growing their business, fending off competitors, finding new customers, marketing their wares and staying on top of ever-evolving regulation. Here’s how running a cannabis company might look after legalization.

Growing Pains in the weeks and months ahead, demand for product will certainly pick up. Producers will have to grow a lot more than they do now, but how much is difficult to predict. A 2018 Deloitte report found that 20% of Canadians already use cannabis recreationally and 17% more will start using after legalization. The accounting firm estimates that retail sales of dried marijuana leaves alone could top $9 billion in Canada. In 2019, the extracts market will likely become legal, too, which will lead to more business opportunities.

Many producers have already secured amendments to their licenses to increase output. Large players are building facilities ranging from 100,000 to 1 million square feet, while smaller players are ramping up production, too. That could be a problem. “Overcapacity is a risk,” says Scott Willis, head of research for Toronto-based investment analysis firm Grizzle.

Setting yourself apart from the cannabis crowd will be crucial, says Deepak Anand, vice-president of business development and government relations at consulting firm Cannabis Compliance Inc. Quality will matter as much as quantity for securing a spot in the market. “The key is very much going to be execution,” he says. Canadians should look to how companies in the California market are gaining market share. Businesses there are developing innovative products, often in niche businesses such as tech and edibles, and often through partnerships.

It will take more than just a production increase to meet demand, though. Investments in research and development and finding talent — which will only get harder as competition increases — is also a must. “HR is becoming one of the biggest, if not the biggest, issues in the industry,” says Anand, adding that it may worsen as the sector grows.

Financial Insecurity Cannabis companies are going to continue needing investments if they’re going to grow — at least until they start making profits. Medical cannabis operations have a leg up, as many are already selling cannabis and have revenues to cover regulatory costs or invest in expansion. Many will also be competing in the recreational market, says Allan Rewak, executive director of the Cannabis Council of Canada. His organization represents about 85% of Canada’s medical producers, and “the majority of them plan to sell to the legal market,” he says. Those starting out in the recreational cannabis market may have a harder time financially.

Up until now, turning to banks for financing hasn’t been much help as they’ve been reticent to give cannabis companies loans — some of these companies have even had trouble getting bank accounts. That could change as attitudes toward cannabis transform, and as the industry becomes more legitimate, says Rewak.

Another option for capital-seeking entrepreneurs is the stock market. There’s huge demand for cannabis stocks, with numerous companies, such as Canopy Growth, which has seen shares rise by 502% over the last 12 months, experiencing massive gains. The equity market could be less friendly to newcomers, especially once the hype dies down and these companies start reporting real profits and revenues. “I don’t think the markets fully understand what’s happening in cannabis,” he says. Smaller companies might find more luck with venture capitalists from Europe and Asia who are starting to see cannabis as a global opportunity.

Sellers’ Markets once cannabis becomes legal, it’ll be time to sell, sell and sell some more. Unfortunately, companies can only unload product to one kind of client: provincial governments. The provinces will act as a middleman, buying bud and then selling it to private stores or in their own government shops. You’ll be subject to their rules around product display — both on shelves and online — and price. “You’ll have to take whatever the government is going to give you,” says Willis.

Exporting is the natural next step. While many U.S. states have legalized cannabis use for medical and recreational purposes, weed is still illegal at the federal level, so that limits opportunities and increases red tape. “There are extremely secure rules on shippings,” says Rewak of sending cannabis south over the border. “We have not had one gram of [medicinal cannabis] diverted.”

Most recently, BC-based Tilray received approval from the US Government to export medical cannabis for use in a clinical trial at the University of California, San Diego Center for Medicinal Cannabis Research.

It may be wise to look to the rapidly growing European market. In Canada, provincial buyers may pay $6 or $7 a gram for flower; in Europe, the price can be $20 or $30. But along with dealing with a whole other raft of paperwork, your facilities will have to meet European Union–level safety and sanitary standards, and you’ll need a European-based partner to be your importer.

Marketing Matters If you want to get people to buy your product, you’ll need to market, just like any other business. However, there are very rigid rules and regulations on advertising thanks to Bill C-45, which nixes print and radio ads, billboards and celebrity spokespeople or mascots. “You have to be kind of guerrilla with your marketing,” says Willis.

E-newsletters are allowed, provided recipients have opted in to comply with Canada’s Anti-Spam Legislation. Companies are allowed to have social media feeds, but, according to Bill C-45’s wording, postings can’t imply “a way of life...that includes glamour, recreation, excitement, vitality, risk or daring.” Canopy Growth has found a creative workaround by cheekily posting, “We’re Hi.ring,” and, on Canada Day, juxtaposing a maple leaf and a pot leaf. Meanwhile, some organizations are hosting “informational” sessions that will allow them to host art shows and other events with product experts on hand.

No matter the business, cannabis companies will need help with both marketing and compliance to find ways to set themselves apart. And the price of an error is steep: fines for breaching the Act’s marketing rules can top $5 million and entail up to two years in prison. “There are always ways to work within the system,” says Anand of marketing cannabis.

Fortunately, the cannabis industry is a new one and while traditional business rules apply, companies can forge their own paths, too. If you can find innovative ways to build your brand and not run out of cash doing it, then you should be able to thrive in a legal world.