THE CANNABIS INDUSTRY has been full of surprises in its short history, many of them caused by the unintended consequences of regulations. Some were positive surprises: During the 2020 COVID-19 lockdowns, most regulators somewhat surprisingly decreed cannabis sales an essential service without much discussion. Many even allowed curbside pick-up and delivery for the first time to allow medical patients—and even adults coping with anxiety—safe access to their medication during the pandemic. Cannabis sales continued to boom while many sectors shrank.
The downside surprises have been more along the lines of unrealistic market-performance expectations dashed, in some cases repeatedly. In an industry that’s moving a $200 billion worldwide consumer product category into legal channels for the first time in modern history, it’s easy to develop unrealistic expectations and hold on to them too long.
Despite the speed bumps, we should anticipate less volatility going forward. As cannabis operators and investors around the world become more experienced, we can expect fewer surprises, positive or negative, from unexpected impacts of regulations.
Here are some of the lessons learned so far:
1. Lessons from Canada
There is such a thing as too much cannabis. In the run-up to the Q4 2018 launch of adult-use sales, cash-rich licensed producers (LPs) built up 66 metric tons of dried flower inventory. This despite the Canadian federal government leaving the allowed number of stores in the hands of clearly recalcitrant provincial regulators. With just a handful of stores open by year’s end, only about 26 tons sold that quarter.
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Even so, few LPs cut back on their production levels. Monthly demand for dried flower for all uses had grown to about 30 tons by the end of 2020, thanks to federal regulators allowing edibles and concentrates late in 2019, but by then unsold inventories had exploded to a nerve-jangling 1,000-plus tons.
2. LESSONS FROM U.S. STATES
No other U.S. state does medical cannabis like the Sooner State. Oklahoma allows doctors to recommend cannabis as they see fit and sets its retail license fees low with few restrictions.
Oklahoma is now:
- No. 1 in the U.S. in percentage of the population with medical cards
- No. 2 in the U.S. in dispensaries per capita
- In the top 10 U.S. states in cannabis employment
The “Oklahoma Surprise” leaves us with some questions worth tracking. Which companies will win the competitive battle created by such liberal licensing? Will regulators in other conservative states seeking post-pandemic economic benefits and cannabis tax revenue follow the Oklahoma example when setting their own rules?
3. Lessons from around the world
No other country does medical cannabis like the United States. America was the driving force behind the United Nation’s Single Convention on Narcotic Drugs in 1961 but is now the country least in compliance with it. Canada’s tightly controlled mail-order medical system is as permissive as it gets outside the U.S.
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In the rest of the world, pharmacies alone are allowed to dispense medicinal cannabis products that meet stringent standards common to the pharmaceutical market. The resulting disappointing market growth in Europe and elsewhere is another contributor to Canadian LPs’ overabundance of inventory and continued operating losses. International revenue growth at those LPs with the biggest bets on the export market—such as Canopy Growth, Tilray and Aurora—has remained well below levels expected when Germany legalized medical sales in 2017.
Nobody is rushing to follow Canada’s lead into widespread adult-use commercialization. Uruguay gets credit for being the first to legalize adult use, but Canada was the first—and still only—country to fling open the doors of dispensaries to all grown-ups. More than three years later, it now seems likely to keep that distinction for some time, at least among sizable G20 economies.
Courts in Mexico and South Africa have recognized cannabis consumption as a human right, but both governments have slow-walked the creation of regulatory regimes that would allow commercial activity. In Europe, Luxembourg last October became the first EU nation to legalize personal recreational consumption. The new German government has promised to do the same in 2022, but an unfettered commercial cannabis market could still be years away.
The bottom line
If it sounds like all these lessons add up to the U.S. and Canada dominating legal cannabis spending for the foreseeable future, you’re right: The two countries accounted for 98 percent of the $21.7 billion global cannabis market in 2020 and are pegged to still account for 91% of a projected $55.2 billion market in 2025, according to Brightfield Group forecasts.
But for those who do their homework and avoid unrealistic expectations, there are opportunities in every corner of a worldwide market likely to grow at 20 percent-plus CAGR through 2025 and beyond. That kind of overall market growth is a given. For companies, success will go to those who understand how regulations impact revenue and profit growth and are ready to move quickly when the rules change.
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