Marijuana Legalisation 2.0 – How Edibles and Extracts will Upend the Market

In October 2019, Canada will experience its second wave of marijuana legalisation

In the past we've discussed how poorly implemented the legalisation of recreational cannabis has been in Canada. First there was the severe lack of brick and mortar retail stores, which has hampered sales and restricted consumer uptake.

Ontario easily earned its title as the worst offender in this regard, after it kicked off Day One with zero physical cannabis stores established, despite being the largest province by population in the country. Alberta has also come under fire as a result of its reticence to grant additional cannabis retail licenses after a moratorium was placed on their issuing in November 2018, though this has since been lifted.

However, the Canadian government's biggest mistake was its decision to initially limit marijuana legalisation to flower and low-potency oils. The move substantially handicapped the country's burgeoning recreational cannabis industry, as there is little demand for low-potency oil products.

Conversely, high-potency vape oils—and other cannabis concentrates—are one of the fastest growing sectors of the marijuana market. As evidence, one only needs to look to at sales data taken from California in 2018, which shows that the sale of concentrates had outpaced the traditional plant for the first time in history, accounting for 37 percent of all cannabis sales. In fact, its estimated that the black market for vape oil cartridges in Canada is already worth over $1 billion per year.

Clearly things have not been handled well. But, this could all be about to change in October this year, with the arrival of a new wave of cannabis products to the Canadian market which some experts have dubbed "Legalisation 2.0".

Legalisation 2.0 is set to take place on October 17, 2019—precisely 12 months after the first phase of marijuana legalisation kicked off—and will see cannabis edibles, extracts and concentrates become legal for sale in Canada. This will include all form factors of cannabis concentrates, such as vape pens and cartridges, extracts (wax, shatter and oils, etc) as well as chocolates, beverages, and other edibles.

While this may not seem like a big deal to the layman, we believe that this event will significantly propel the value of Canada's legal cannabis market, whilst simultaneously eroding the customer base of the black market, which is currently thriving due to the lack of legally available form factors.

Evidence of this can already be seen in mature markets such as Colorado, California and Washington, where edibles and extracts now constitute almost 60% of the market. While there still is—and always will be—a strong market for the raw plant itself, a new generation of cannabis enthusiasts are demanding methods of ingestion that go beyond traditional smoking.

With the second stage of marijuana legalisation set to occur in October, we predict that the coming wave of products will begin hitting the shelves in December, due to the requirement that cannabis producers provide 60 days' notice to Health Canada if they intend to sell any new products.

As a result, we're expecting big revenue numbers from Canadian retailers—along with associated enthusiasm from investors—going forward into 2020. So before this new avalanche of cannabis products hits the market, we thought we'd take a look at what you can expect once Legalisation 2.0 finally reaches the Great White North.



O, Cannabis!

Once October 17 hits, then edibles, topicals—comprising lotions, balms, creams and other products—concentrates and extracts will all become legal in Canada, which is good news for consumers looking for alternative ways to consume cannabis.

The upcoming change is being eagerly awaited by those in the Canadian cannabis industry, such as the co-founder of Olli Brands, Sarah Gillin, who is already planning on capitalising on the changes by launching a line of cannabis-infused tea blends later this year. More importantly, the new laws will also offer regulatory certainty to the Edible, Extracts and Concentrates Market, which has been impeded in the past by the product's questionable legal status.

"We had planned a lot of our business around the draft edibles regulations that were announced in December and much of what was announced on Friday confirmed these assumptions," Gillin said.

"It is nice to finally have certainty."

The Canadian government has confirmed that there will be some restrictions when it comes to the amount of THC allowed per product.

Similar to sales of dried flower, the potency of these products will also have to be clearly labelled on the packaging, while also being limited to just 10mg of THC per package. The manufacturers of edibles, extracts and concentrates will also be subject to additional tough regulations on packaging once Legalisation 2.0 takes effect, which stipulate that it must be opaque, child-proof and designed in a way that is non-appealing to young people.

While it's understandable that Health Canada has taken a cautious approach—which some have described as "slow but steady"—to rolling out this new wave of CBD products, some of these regulations have already drawn criticism from the cannabis industry.

"Overpackaging is already a concern in the cannabis space because of strict guidelines, and it will most likely get worse with a limit for edibles of 10 mg of THC per package instead of per piece," cannabis advocate Sarah Hanlon said.

Data published by Deloitte has indicated that the perceived safety of edible will be a big draw for many neophyte cannabis enthusiasts, as they view the products as being less risky than smoking the dried plant.

"Deloitte estimates that the annual Canadian market for edibles and alternative cannabis products is worth C$2.7 billion."

– Deloitte Nurturing New Cannabis Report

According to Danielle Blair, the founder of Calyx Wellness—which sells a line of hemp-based CBD tinctures—broadening the scope of the Canadian Market will be a "positive step".

"We're moving forward in regards to regulating edibles, especially when it comes to medicinal patients—this is the best approach for their health," Blair said.

One important regulatory guideline to consider is Health Canada's recent clarification of the restrictions around cannabis-infused beverages, which states that they must not be mixed with alcohol, nicotine or caffeine.



High Demand

According to a report form Deloitte entitled, Nurturing new growth: Canada gets ready for Cannabis 2.0, the next phase of marijuana legalisation is expected to generate significantly higher profits for retailers than already legal cannabis products, potentially pushing total sales to exceed $7 billion by the end of 2019.

Deloitte's study also found that the introduction of cannabis edibles and concentrates to the market will generate new product mixes, reaching consumers who may have previously been reluctant to experiment with traditional consumption methods.

These neophyte or "cannabis-curious" consumers were identified by the report as typically being older—often female—and primarily interested in consumption formats that they are already familiar with, such as edibles.

"Cannabis companies with strong professional leadership and business fundamentals, a focused strategy, and a willingness to place bets—while playing the long game to wait out the changing regulatory environments—will be the ones who succeed and prosper."

– Deloitte National Leader, Jennifer Lee

And while this might not seem like much to get excited about, it's important to remember that the value of the global market for alternative cannabis products is expected to almost double over the next five years, potentially climbing to USD $194 billion by 2024.

The Consumer Advisory and Analytics Practice National Leader for Deloitte, Jennifer Lee, estimated that the edibles market in Canada alone could be worth "at least $1.6 billion a year in Canada, with cannabis-infused beverages adding a further $529 million".

"According to our research and stakeholder interviews, much of this economic boost will be on top of current cannabis product spending. The introduction of cannabis-infused edibles will clearly threaten the alcohol industry as consumers are using the product for similar usage occasions."

"The global cannabis market is enormous, and Canadian firms are well-positioned to play a pivotal role as this market grows and evolves," she said.

However, some are also predicting that Canadians may face supply shortages when edibles and concentrates finally hit the market, as almost all of these new products are created using concentrated extracts derived from cannabis biomass. This means that the market is likely to initially experience a severe bottleneck in supply—as extraction has still not been formally legalised in Canada—severely limiting the activity of extraction companies operating within its jurisdiction.

The issue is only being compounded by Health Canada's licensing backlog, which led Valens GroWorks (CVE: VGW) to announce in March that it expects to be overwhelmed by extraction orders in the leadup to marijuana legalisation 2.0, even if it triples its production capacity.



Growth Industry

While Canada may have initially stumbled in its efforts to enter the marijuana race, legalisation 2.0 will provide an opportunity to catch up with international competitors and address the initial rollout issue that have hampered its nascent cannabis industry.

More importantly, the introduction of edible cannabis products and high-potency vape oils will help to further erode the presence of the black market in Canada, while also offering a powerful new revenue stream to marijuana producers and retailers alike.

And with the market already gearing up for products to begin entering stores in December, it looks like Canada is going to have a very merry Christmas indeed.

If you're interested in learning more then watch this space, as July is Edibles, Extracts and Concentrates Month here at The Green Fund.

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Hugo Gray
Hugo Gray

Hugo Gray is a Melbourne-based journalist with a body of work that covers a diverse range of topics, including immigration law, sex technology, and now the rapidly expanding cannabis industry.

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