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This fall I appeared on a panel at the Grow Up Conference in Edmonton to discuss the state of the cannabis industry and offer some thoughts about its future. My assessment: with the exception of medical exports, which are growing rapidly, and perhaps cannabis health products finding new channels, Canada’s cannabis economy seems to have hit a wall.
Recreational markets have stagnated for some time, retail prices remain low while cannabis equities are still trading at a fraction of their peak values reached in early 2018. Since legalization, the Canadian Cannabis Survey has shown that recreational users of the legal product amount to a niche market, albeit at 20-25 per cent of the population a fairly large one. The domestic medical market remains small and continues to shrink. At 184,000 registered users in 2023, it’s 26 per cent smaller than in 2022. Retail coverage appears to be saturated while operating costs have risen sharply in major urban centres across Canada.
Walking about the conference I heard the familiar complaints about regulatory restrictions, high taxes and lax enforcement of illegal businesses but little about tapping new growth sources. Granted, 3 per cent overall annual growth to 2029 is forecast (Statista), but I wonder if that’s due to the surge in medical exports and provincial wholesale revenues.
So which way forward?
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One approach to consider is Blue Ocean Strategy, an analytical framework that has helped many businesses achieve high growth. In their landmark 2004 Harvard Business Review article, authors W. Chan Kim and Renée Mauborgne presented the framework as a new way to innovate by discovering new value for consumers. Their thesis is that the business universe is comprised of two spaces, one red and one blue. Red oceans host most existing businesses with readily defined boundaries, characteristics and rules. The game is competition for market share. As the market becomes increasingly crowded, products become commodified, supply outstrips demand and rampant competition begats bloody, red oceans.
On the other hand, blue oceans spring up from markets not yet in existence. As the authors state: “In blue oceans, demand is created rather than fought over.” This is done in two ways: either by creating a completely new industry, as with online auctions (eBay), or by changing the boundaries of existing industries, which is what Henry Ford did in introducing the Model T. The auto industry had existed since the late 1800s, but despite 500+ manufacturers it had few customers. Only the wealthy could afford motor carriages which required skilled craftsmen at least a month to build. Ford’s genius was to expand the boundaries of that industry by adapting the assembly line from the meat packing industry to offer vastly cheaper products that could be built in days. Assembly lines and unskilled workers assembled cars at much lower cost, using interchangeable parts. Ford also deduced that he could pay his workers higher wages so that they, along with the general public could now afford cars, thereby unlocking great value and creating a huge new market.
In classic blue ocean scenarios, markets ripe for value creation are characterized by oversupply, product commoditization, reduced brand distinctiveness, margin compression, price wars, regulatory complexity and shrinking profits. Does this sound familiar, cannabis colleagues?
What might a Blue Ocean Strategy look like in our industry?
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In my previous column I described how hemp beverages took U.S. cannabis businesses by surprise to achieve exponential growth. New value was tapped by identifying demand from different customers, using familiar distribution channels (supermarkets and liquor stores) where most people shop, bypassing dispensaries. Low-dose hemp sellers turned the prevailing logic of cannabis on its head to focus on low-potency products for users who prefer these to high-THC. Hemp businesses created distinctive brands that speak directly to the intended buyer. The product is manufactured from a widely supplied ingredient that can cross state boundaries and be readily made by contract producers. Gaps in the U.S. Farm Bill paved the way, but the success of this market is not just a regulatory artifact.
Are there other blue oceans hiding in plain sight? One possibility I’ve touted is bespoke cannabis based on the premium wine model. Devoted outdoor craft producers are already approaching this model. Aided by the expansion of farmgate in several provinces these cultivators are focused on terroir and regenerative agriculture, using living soil and natural pest control. Consistency is less important here than in CPG-oriented or medical cannabis, because seasonal variation can be leveraged and even celebrated as it is in winemaking. Energy costs are much lower than indoor and greenhouse growing, and there’s benefit to be gained from the moderate THC levels and more distinctive terpenes often associated with outdoor cultivation.
The idea is not to churn out high volumes of weed but to focus on quality to achieve greater margins. Unique terroirs and extensions into tourism could be used to build brands and attract new customers. Creating regional appellation schemes to map terroir and establish standards would differentiate products and provide options at different price points. This could also shift government’s perspective, from seeing cannabis as a harmful substance to be overmanaged, to welcoming it as a business with local support and a broader constituency.
A few factors are constraining the development of this business model: a lack of capital; a need for consumer education; marketing and branding that focuses on enlisting new customers as well as pitching to enthusiasts. There are regulatory gaps and hurdles. But Canada’s domestic wine industry had similar issues not long ago. The Vintners Quality Alliance (VQA) system was developed at the behest of winery owners who worked together to lobby politicians. Climate change and calls for a cannabis tourism strategy are aligning to create more favourable conditions for this model.
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These scenarios may not produce entirely competition-free blue oceans, but they do focus on creating new value and new markets. The obstacles are surmountable.
Denis Gertler is a regulatory consultant, board member and former government regulator.
This post was originally published by our media partner here.