Many people ask me where I see the Cannabis Industry in the next 5 years? It's a question everyone is looking to answer, but no one can really answer it. The industry is simply moving too fast to know exactly what lies ahead.
However, there are trends, and if one follows the breadcrumbs, one can certainly a glimpse of what the future holds.
It's a commodity
There is going to be so much weed. Everyone is racing to produce. Colorado (having legalised marijuana in 2014 has seen a dramatic decrease in the price of cannabis per kilogram. Once producers scale up, there is going to be a massive oversupply of cannabis and this will put downward pressure on the prices.
Producers that are not differentiated will suffer in the medium term and the small "low cost" growers will struggle to gain a foothold. In Australia, there is currently a land grab underway with may small companies looking to establish cultivation businesses.
In 5 years we do not see any major Australian cultivators, but rather and move to production and distribution to the APAC market. Right now, we are starting to see new countries (and new markets) open up across APAC.
Thailand is on the brink of legalising marijuana for medicinal purposes. Australia would be well positioned by then to be the premium-grade export leader in the region. One only needs to look at Milk Powder and the ravenous Chinese demand to get an idea.
It's not even grown
Synthesised cannabis – CBD that is "grown" in labs and not in greenhouses. Think CBD compound without having to grow the plant.
Recently the Cronos Group announced they had invested in GinkoBio, a company that is pioneering the producing of synthesised CBD. This is going to have a significant impact on the industry as if they get this right, then this is going to put even more pressure on companies that have spent inordinate amounts fo Capex to establish cultivation centres.
This is an area where Australia could shine. Most of the international companies are investing in Australia with a particular emphasis on the R&D licenses and the development of genetic IP. Australia has the opportunity to be a Global R&D hub if Government, Companies and Canadian partners work together quickly and effectively.
Medicinal Cannabis will eventually be commoditised and the protectable IP will be where the real money is made, as this industry develops into a more mature pharmaceutical market.
In 5 years, we see that with the right focus and international input, Australia has positioned itself at the epicenter of global advances in Cannabis science and the creation of protectable IP.
The money's in retail
For the past couple of years, investors have made massive gains investing in the licensed producers (Aphria, Canopy Growth, and Aurora to name drop a few). However, now that recreational legalisation has taken place and the retail market is in full swing, it is the retailers that will ultimately capture the lines share of margin.
In Australia, we have yet to see even one dispensary open for the distribution of medicinal marijuana. The learnings from the Canadian medicinal companies is that all patient access and data are critical at the early stage. Although it will take some time (6 months to a year) for the restrictions on GP's to lighten and the number of qualifying conditions opens up, but Australia will develop in this area. Early movers who train and win over doctors will win.
However, it is our prediction that in 5 years, Australia would have legalised cannabis for recreational use and the dispensary and retail market will be in full swing. Potentially up to three large networks and a number of boutique players should dominate the market. Expect to see global brands (MedMen as an example) to have set-up shop in Australia.
And speaking of retail, brands are going to be where the money is made. Consumers will demand the highest quality of brands and research has shown that consumers display great loyalty to their retail outlet and the brand of choice. After all, do you buy beer or do you buy Corona?
And not just in the recreational market, but in the medicinal markets too. Once big Pharma enters the game and the market has matured slightly, then the big brands will deliver standardised product through their (extensive) distribution and sales networks.
Expect brands (think Panadol as an example) to dominate the market particularly in the are of pain prevention and management.
In Australia, we see the emergence of "craft growers" delivering high end, premium brands that gain rapid market share. Although the lines share of brands will come from the North American markets, Australia has a history of producing premium grade exports (fruit, wine etc.) and we see no difference in the future of brands.
The biggest Company in the world isn't around yet
And finally, the biggest difference in 5 years time will be the leaders of the market. It is our belief that the largest cannabis company in the world does not yet exist.
Canopy Growth leads the pack with a valuation of CAD$11.6 billion (at time of writing), however with BIG Pharma, Tobacco and beverages waiting in the wing, it is not inconceivable that Canopy will eventually be dwarfed by the likes of a Coca-Cola, Novartis or Marlboro backed company.
The entry of these corporate giants would significantly consolidate the market. Even in Australia, with the significant global investments underpinning most of the big ASX listed stocks, expect consolidation to occur with global tentacles infiltrating the market.
Think about it, there is yet to be a GSK, Diageo or Phillip Morris in the market.
In summary, the market is ultimately still too young and volatile in nature. There are literally hundreds of small, fragmented players, dwarfed by a couple of multi-unicorn players.
As the market matures, with regulated federal legislation across every country on the planet, expect a group of really big companies to dominate the scene, all focussed on branding and retail.
Welcome to the global marijuana green rush. Potentially the greatest health care disrupter of our time, and a market that is estimated to be bigger than beer.
And they told you money doesn't grow on trees.