Legal marijuana market set to be worth $4.34 billion in 2019

15 June 2018 Consulting.ca

As recreational marijuana is set to become legal this summer, the industry will be partially thrust out of the black market and onto the shores of legitimate business – and government taxation and regulation. Though a large illegal market will remain, the legal market is set to be worth up to $4.34 billion by next year, according to a recent Deloitte report.

With Canada’s C-45 cannabis bill caught up in Senate wrangling, Canadians are now looking at nationwide marijuana legality closer to the end of summer or early fall, rather than the July 1st date long-branded into the minds of anxious tokers. But it’s just a matter of time now before Canada becomes the first G7 country with nationwide, legal recreational cannabis (Uruguay was the first country to legalize it, in July of last year).

The prospect of legalized cannabis has already spurred a huge deal of entrepreneurship and innovation. With legalization, the Canadian government hopes to break up the illegal trade of marijuana, while reaping taxes from the drug, as it does with other ‘vices’ like alcohol and tobacco. Legalization also reduces resources spent on imprisonment and policing in regards to marijuana, while removing a possible source of revenue for criminal organizations by pushing it into a legal, regulated sphere.

In order to find out some of the contours of the heady new frontier of legal cannabis in Canada, accounting and consulting firm Deloitte has released its 2018 Cannabis Report, titled ‘A society in transition, an industry ready to bloom.’ The report examines probable market size, as well as consumer preferences and behaviour.

Recreational cannabis - Market size

Deloitte estimates that the total cannabis market – including medical, legal, and illegal recreational products – will have sales of up to $7.17 billion in 2019. Up to $4.34 billion is expected to come from the legal recreational market. Consumption through legal channels is predicted to rise by 35%, while the overall spend is expected to rise by as much as 58% - primarily because of higher legal product pricing.

Legalization is expected to shift the majority of purchases to legal channels, with current marijuana consumers in Canada saying they’ll move 63% of their purchases to legal sources. In Quebec, however, a lower proportion of 47% is expected to switch to legal channels. Notably, less frequent consumers are more likely to buy legally (69%) than daily consumers (37%), possibly because of price concerns and/or habit.

Consumers say they’re willing to pay more for regulated and legal cannabis, but how much depends on what province they’re in, and, as mentioned above, their consumption habits. In Ontario, respondents are willing to pay a loonie more per gram (from an average of $8.33 today to $9.33). In Quebec, where current average prices are the lowest, ($7.53 per gram), consumers are only willing to pay up to $7.81 per gram – or just 3.7% more.

Price upon legalization

Deloitte finds that legalization will bring in older consumers than today’s illegal marketplace. Today’s consumers tend to be younger ‘risk takers,’ with a high school or college education, who are willing to technically break the law for a toke of reefer. Legalization will bring in older ‘squares’ – typically middle-aged, with a university or graduate level education. Unlikely to have a large social network, these more conservative experimenters will be unlikely to consume more than once a month.

That said, 74% of them have consumed cannabis before, and 41% have partook within the last five years. Legalization and the removal of risk, be it legal or health & safety related, will entice more of this category to occasionally return to their ‘college days.’

Making the Switch

Reasons to transition to legal channels

Legalization isn’t enough to convince most current users to abandon their suppliers, but Deloitte suggests that the right mix of quality, price, and safety will get tokers to switch rather than fight. Over half of respondents not planning purchase all their cannabis legally said that better-quality products at a range of price points adequate for all budgets would get them to leave the illegal market. 41% responded that they would switch for products that are certified safe to use.

Brand names don’t carry the same importance as the above criteria, with only 16% saying a familiar brand name would get them to switch completely to the legal market. This is perhaps unavoidable, as there is no Coca-Cola of weed, and advertising will be limited as it is for cigarette companies. Deloitte expects firms that analyze and respond to customer needs, improve customer experience, and fine-tune product quality will be able to snag more customers from the black market in the future.

Purchasing behaviour: frequency and amount

Cannabis purchasing is going to become more frequent among purchasers of all types after legalization, suggesting that cannabis consumption will rapidly become an even more normalized activity. According to Deloitte’s survey, purchases by frequent users is set to rise 22% after legalization, going up from 2.5 times per month to 3.1 times per month. Purchase amount, however, will remain the same for frequent users, at just under $100.

There will be higher effect on current and likely less-frequent users, with purchase frequency expected to rise 121%. Average total spend is likely to rise from $16.61 to $27.87 per quarter year, an increase of 68%.

Consumption behaviour: frequency of use

Though frequency of purchase may go up after legalization, levels of consumption won’t significantly increase, according to the report. 41% of all consumers will use cannabis products less than once a month. Of current users, those that consume daily will stay unchanged at 20%; those use cannabis 1-6 times a week will increase from 33% to 35%, while those that consume once or twice a month will rise from 24% to 27%. Current users of less than once a month will shrink from 23% to 18%, driving the marginal growth in the other categories.

The report also found that consumers will use slightly more per occasion after legalization. The average amount consumed per occasion is expected to rise 11%, from 0.82 g to 0.91 g – an increase Deloitte attributes to the anticipated popularity of cannabis-based edibles.

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Canadian cannabis firms have attractive international opportunities, MNP reports

18 April 2019 Consulting.ca

Accounting and consulting firm MNP has released a report examining the comparative favourability of international cannabis markets.

As the first G7 country to legalize recreational cannabis, Canadian businesses are in an advantageous position to steer the emerging sector. However, Canada’s market is still a small one in the global scale of things. As in the case of other industries like manufacturing or natural resources, Canada’s cannabis firms need to pursue opportunities abroad in order to compete globally and unlock true growth potential.

"Canadian cannabis firms have the financial capital, intellectual capital, human capital, and a supportive policy framework to germinate the seeds of international success," Glenn Fraser, MNP's national cannabis co-leader, said. "Whether opportunities blossom depends on how effectively they leverage those advantages to get in on the ground floor of new markets. The time is now for Canadian cannabis companies to take a leadership role and replicate the Canadian model in new environments."

For now, only Canada and Uruguay have legalized recreational cannabis sales on a national level. However, numerous countries have legalized medical marijuana, and more still are contemplating recreational legalization, encouraged by Canada’s example as well as the changing attitudes of citizens.

MNP, a nationwide accounting and consulting firm with a strong cannabis advisory practice, recently released an illuminating report on the comparative attractiveness of international cannabis markets. The firm analyzed 16 international markets with dynamic cannabis sectors, considering factors like available financing, taxes and fee structures, and policy maturity. Though no markets received top marks across all categories, several still showed great promise.

Financing opportunities

Accessing capital, banking, and financial services can be a challenge in some markets, but remains an important part of market viability and business success. As such, MNP’s report analyzed the relative ease of accessing capital through public or private markets, as well as the availability of banking services.

Israel, Switzerland, Australia, and Malta emerged as the markets with the best financing opportunities. Israel’s cannabis sector, which has seen strong investment from Canadian firms, has also been buoyed by the anticipated legalization of exports. The Israeli market is largely supported by private equity firm iCan, which represent firms from more than 40 countries.

Switzerland’s cannabis market has also seen heavy investment from Canada, while the SIX Swiss Exchange and Bern exchange provide ample access to further capital. Venture capital is also expanding rapidly.

Australia, meanwhile, has the Australian Stock Exchange, which is already home to more than 20 cannabis stocks, including AusCan, Bod Australia, and Atlas Pearls.

Malta has strong access to capital though the Malta Stock exchange, as well as investment from banks. The small island nation has a particularly vibrant emerging medical cannabis sector, which has largely been built from international investment. "If Canadian businesses want to build eminence in new countries, they need to involve themselves in cannabis' continued integration into healthcare," David Danziger, senior vice president, assurance, MNP, said. 

"Companies who are already active in regions with a burgeoning medical market will have a clear advantage – both in terms of brand awareness, infrastructure, and international relationships – if and when those areas transition to recreational legalization," Danziger added.

Colombia, Jamaica, Denmark, Germany, and the UK were tagged as mid-level markets for financing opportunity, while Uruguay, Mexico, Netherlands, Portugal, Italy, Africa, and Asia were on the low-end.

Taxation and fees

Another central factor is the level of taxation and fees, which determine overall profitability, but also cannabis sector viability – set taxes and fees too high, and consumers will flock to the black market instead of buying overpriced legal pot. Uruguay (corporate tax rate 25%), Portugal (21%), and Jamaica (25%) were deemed as having the most favourable tax and fee burdens. Asia also entered the top tier, with China holding a corporate tax rate of 25%, and Thailand carrying a favourable 20% rate.

The UK, Netherlands, Australia, and Mexico were in the middle range, while Colombia, Israel, Switzerland, Malta, Italy, Denmark, Germany, and Africa were in the high-taxation range. All of the countries in the mid and high tier for taxation were hampered by either higher corporate tax rates, value added taxes (usually in 20% range), or a combination of both.

Policy maturity

Colombia, Jamaica, Australia, Malta, and Germany have the most mature and open cannabis policy environments, according to the MNP report. Jamaica is setting itself up as a premier legal cannabis producer, with progressive cannabis laws and dispensaries that allow tourists to purchase medical cannabis.

Colombia is creating a strong export market, with 80 companies producing cannabis products, many with international investment. The sale of dried cannabis for medicinal purposes, is, however, still barred.

Australia has a strong amount of domestic production underway with investment from Canadian firms, and recently permitted cannabis exports. There is also the belief that the government will start reimbursing medical marijuana in the years to come.

Though it has a miniscule population, Malta’s cannabis industry has attracted heavy international investment. The country’s high cost-per-gram paid by patients, as well as its liberal medical cannabis importation policies, make the country an attractive target.

Finally, Germany has perhaps the most advanced medical cannabis market, with its own government agency and costs coverage by the national health plan. The number of insured patients and medical cannabis imports are both on the rise, and some executives believe recreational legalization is on the horizon.

Uruguay, Israel, Italy, the UK, and Mexico were deemed to have mid-level policy favourability, while the Netherlands, Switzerland, Portugal, Denmark, Africa, and Asia had low-end policies. The Netherlands, despite its image as a pot haven of sorts – especially in Amsterdam – is actually just lax on enforcement, as the drug is still federally illegal. Many of the countries on the list have decriminalized personal possession and consumption of marijuana, but its sale and production remains illegal (outside of medical parameters). 

Overall, Jamaica and Australia emerged as perhaps the most attractive cannabis markets, with Australia in the high tier for financing and policy, and mid tier for taxation. Jamaica, meanwhile, has high-tier policy, mid-level financing, and a low-tax environment.

Looking forward, MNP advises Canadian firms to double down on their competitive advantages, while building a strong brand at home as opportunities open up abroad. "It's important for local cannabis companies to consider their areas of expertise and invest heavily in owning that position in the market," Fraser said. "The most valuable international opportunities will go to those companies who have developed a sustainable (and transferable) competitive advantage in conjunction with a recognizable brand in their home market."