The Edibles, Extracts and Concentrates Market

Although the cannabis industry is currently in the midst of a temporary downturn, public interest in the market has never been greater.

Celebrities like Snoop Dogg, Martha Stewart and Mike Tyson have begun lending their names to cannabis companies and investors are increasingly interested in securing a piece of the market for themselves.

And it's not hard to see why, when a 2019 study conducted by Grand View Research predicted that the legal cannabis market could be worth as much as USD $66.3 billion by the end of 2025. However, while most cannabis users have historically gravitated towards smoking—either recreationally or for medicinal purposes—as their preferred way of ingesting the drug, consumer attitudes are beginning to change.

A huge shift is coming—which some pundits have begun referring to as "Legalisation 2.0"—that will see a new wave of cannabis edibles, extracts and concentrates hit the market.

But, before you go jumping into this rapidly expanding area of the global cannabis industry, it's important to understand just what the Edibles, Extracts and Concentrates Market actually is.

Edibles

Like many industries that are in an embryonic stage of development, the marijuana sector is still figuring out what products will be its future growth drivers.

One sector of the industry that's beginning to take centre stage is the Edibles Market—which encompasses CBD-infused foods and beverages—with revenue project to grow to $4.1 billion by 2022, according to a recent study published by ArcView Research.

This is unsurprising as edibles have undergone a surge in popularity over the last decade, having already more than doubled their share of the global cannabis market since 2011.

This is being fuelled by a growing wave of "casual" consumers, who are interested in finding ways of ingesting cannabis without actually smoking the plant. Studies have found that this growing cohort of consumers is typically older and more conservative than traditional cannabis users, and as a result, they are more likely to gravitate towards CBD products that are presented in familiar formats, such as baked goods, confectionaries, and beverages.

In our 2018 report, we identified a similar demographic—the "conservative experimenter," typically middle-aged and university educated, focused on family needs or other responsibilities, and more likely to consume cannabis less than once a month.

– Deloitte Nurturing New Growth Report

In fact, research conducted by Dalhousie University has found that up to 93% of Canadians surveyed would be willing to try cannabis-infused edibles once they become legalised in October 2019.

However, its' a completely different ballgame when it comes to the US, where CBD edibles have been legal and on the shelves for several years in certain states.

Consumers in Nevada, California, Colorado and Washington have already demonstrated a robust appetite for such products, and larger companies such as Cannabis One (CSE:CBIS) have begun strategically acquiring numerous edibles brands. The Speciality Food Association even named cannabis edibles and beverages the "Food Trend of the Year", as an acknowledgement of their increasing popularity with mainstream American.

Thus far, CBD-infused gummies have proven to be the most popular individual edible product amongst cannabis consumers, although another area of the market that's currently red hot is CBD beverages.

Experts are already predicting that CBD infused products will be one of the biggest trends to hit the Beverage Market in decades, which has drawn the attention of numerous "blue chip" companies that are looking to cash in on the growing craze.

One of the largest alcohol importers in the US, Constellation Brands, has already shelled out $4 billion for a 38% stake in Canopy Growth (TSE:WEED), while the beer-producing giant, Molson Coors, has teamed up with HEXO Corp (NYSEMKT:HEXO) to launch a line of CBD-infused beverages.

Anheuser Busch has also partnered with the Canadian pharmaceutical cannabis company, Tilray (NASDAQ:TLRY), to pursue the creation of CBD and THC infused drinks in Canada.

Unfortunately, it's not all good news, as the market also carries several risk factors which could potentially impede future growth.

One of the major dangers to the market is a regulatory crackdown, which is becoming increasingly likely due to bad actors operating in the industry. Regulators in the US have been expressing increasing concerns about the labelling, dosage and packaging of edible CBD products, as several companies have been caught out misleading consumers with incorrect information.

Another issue worth considering is the complex layers of taxation that can apply to such products in states such as California. Although this is not currently a critical issue, over time this could push consumers away from legal products—and towards the black market—leading to diminishing demand for CBD edibles.

Extracts

Although sales of the cannabis plant itself have maintained its position at the top of the cannabis food chain for years, the Extracts Market is rapidly gaining ground.

In fact, a recent study conducted by Grand View Research estimated the value of the Extracts Market to be approximately USD $5.3 billion in 2018, while being expected to exhibit a CAGR of 22.1% until 2025. The same study also predicts that by 2025 the size of the cannabis Extracts Market could swell to USD $23.7 billion, while also identifying the increasing adoption of cannabis-based medicine as a treatment option as a key factor driving future growth.

This is because an increasing amount of cannabis companies operating in the pharmaceutical space have begun turning to CBD extraction—rather than the traditional dried flower—as a way of harvesting the raw materials necessary to create their products.

Patients suffering from numerous chronic diseases such as arthritis, Alzheimer's, cancer, anxiety, depression, and epilepsy were all identified as key demographics that will significantly boost the industry's market share. Cancer sufferers were singled out as a crucial factor that will determine future market forecasts, while those living with chronic pain are also expected to generate further demand for medicinal cannabis products.

Additional growth factors cited by the study include the increasing preference for extracts amongst recreational consumers and technological advancements which have made the extraction process cheaper and easier than ever.

The vast majority of this burgeoning Cannabis 2.0 market will be cannabis extract-based products…which we estimate at C$1.6 billion alone. Yet there is significant opportunity elsewhere, including cannabis-infused beverages (C$529 million), topicals (C$174 million), concentrates (C$140 million), tinctures (C$116 million), and capsules (C$114 million).

– Deloitte Nurturing New Growth Report

Pot stocks dealing specifically in cannabis extraction have also proven to be highly popular amongst investors, as they are viewed as being comparatively more stable than traditional cannabis companies. The reason for this is that extraction-service providers typically enter into multi-year agreements that come with predefined minimum hemp and cannabis biomass amounts and delivery time frames.

As a result, extractors enjoy a significantly more predictable yearly cash flow, which helps to reduce risk and lessen market volatility. CBD extracts have also proven particularly attractive to companies operating in derivative products space, as derivatives offer much higher price points and margins than the cannabis plant itself.

For these reasons, the Brightfield Group has forecast a massive spike in US CBD sales over the next three years, with the market research firm predicting that revenue will soar from $591 million to $22 billion between 2018 and 2022, representing a CAGR of 147%.

Oils and tinctures currently hold the largest revenue share for the sector of 65.7%, due to their high availability and low price, with cannabis isolates being anticipated to emerge as the second-largest segment in the Extracts Market.

However, the most highly valued area of the market was still the "Full Spectrum CBD" segment, which was estimated to be worth USD $3.3 billion in 2018. This was attributed to the much-hyped "Entourage Effect", which is said to maximise the therapeutic qualities of cannabis.

Concentrates

While many companies are gearing up to take on the increasingly lucrative Edibles Market, sales data collected from four US states indicates that it may end up being completely eclipsed by another product type known as cannabis concentrates.

Cannabis concentrates are a condensed mass containing THC as its main component, and are commonly known as "dabs". Recent estimates put the total value of the global Concentrates Market at USD $3.7 billion in 2018, which is expected to skyrocket to USD $13.7 billion by 2026, expanding at a CAGR of approximately 17.8% over the next seven years.

Concentrates are often referred to by many different names—such as shatter, budder, hash, live resin, and butane hash oil—and can be consumed in a variety of ways, such as joints, water pipes and edible products. However, it is most commonly sold in the form of vaporiser cartridges loaded with cannabis oil.

And if current market data from Arizona, California, Colorado and Oregon is anything to go by, these concentrate cartridges could be the next big gamechanger for the cannabis market.

All evidence from [Canada's] friends in the south would indicate that concentrates, and especially vape [pens], will be a bigger market than edibles.

– BDS Analytics Vice President of Operations, Greg Shoenfeld

While the sales of cannabis edibles in these states reached an impressive USD $685 million between January and October 2018—according to data provided by the market research firm, BDS Analytics—consumers spent a staggering USD $1.4 billion on cannabis concentrates during the same period.

This means that the Concentrates Market is more than twice the size of the Edibles sector, with cannabis vape pens and pre-filled oil cartridges accounting for USD $972 million in spending. The remaining USD $446 million is accounted for by other forms of cannabis concentrate such as shatter, wax and hash oil.

This point of view was echoed by the Vice President of Operations for BDS Analytics, Greg Shoenfeld, who believes that the popularity of cannabis edibles will inevitably be outpaced by the rise of the Concentrates Market.

"Time and time again, they've been looking at edibles to take over the market, and it's never really played out in the data. Over time, edibles have begun to capture a greater share of the market, but they're still a distant third category," Shoenfeld said

"I think that there's a lot of consumers out there that may be consuming a combination of products, be it vape [pens], flower, edibles, pre-rolls—they could be consuming all of them, but the frequency of consumption of, say, a vape product might be more frequent than how often they're eating edibles."

Typical consumers of cannabis concentrate also differ rather significantly from those who prefer edibles. Data has shown that unlike consumers of edibles—who tended to be older and more conservative—cannabis concentrate users were found to skew younger while displaying less aversion to risk-take behaviours.

Legalisation 2.0

In June 2019, Health Canada released details of the highly anticipated legalisation of edibles, extracts and concentrates in October this year.

The upcoming change has become known by a variety of names—including "Cannabis 2.0" and "Legalisation 2.0"—and has been hotly anticipated by those working in the cannabis industry. The co-founder of Olli Brands, Sarah Gillin, is already planning to capitalise on the new changes by launching a line of cannabis-infused tea blends later this year.

"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 introduction of Legalisation 2.0 is expected to supercharge the Canadian market, which has been underperforming in recent months. 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.

As of October 17, 2019, 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.

Data published by Deloitte also indicates that the perceived safety of edible will be a big draw for many neophyte cannabis enthusiasts, as they view the products as being safer 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," she said.

However, the Canadian government has confirmed that 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.

Manufacturers of edibles, extracts and concentrates will also be subjected to additional tough regulations on packaging once Legalisation 2.0 takes effect, which state that it must be opaque, child-proof and designed in a way that is non-appealing to children.

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.

Budding Market

There are few industries in the world that are expected to deliver as rapid or consistent a growth rate over the next ten years as legal cannabis. In fact, the Cowen Group has predicted that by the end of the next decade the sector could see more than $75 billion in annual worldwide sales.

However, it's important to remember not to get blindsided by the dried flower segment of the market, which has been at the forefront of the industry since its' inception.

Although the Edibles, Extracts and Concentrates Market gets considerably less attention than its smokable counterpart, it could still offer a potential goldmine to cannabis investors. And with the upcoming advent of Legalisation 2.0, there's no better time to get on the bandwagon.

Further in-depth explorations of the Edibles, Extracts and Concentrates Market can be found in the articles listed below. Investors who are looking to learn more should watch this space, as we will continue to post further updates on the sector as they emerge.

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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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