Cannibalization: Insights for Firms and Policymakers
By Esteban Rossi I., Ph.D., Analyst, New Frontier Data
“If you don’t cannibalize yourself, someone else will,” warned legendary Apple co-founder and CEO Steve Jobs, and his axiom resonates in the legal cannabis industry, where ambitious entrants compete in an emerging space where the rules remain largely unsettled. It is to be expected for young companies to compete in pursuit of their piece of the market, but since most regulatory frameworks remain unfinished, the competitive dynamics cause unintended effects, often hindering the growth of the sector overall.
Friends and Foes
The cannabis industry can be generally divided between four niches or segments which have occasion to clash: The first consists of the home-growers who cultivate cannabis in their backyards and consume in private spaces. Home-growers constitute a diverse group including hobbyists who purchase expensive growing equipment, patients with chronic conditions, cannabis connoisseurs, and adult consumers who enjoy their cannabinoids. The segment continues to be both under-researched and underserved, and exhibits unique interactions with the illicit market. While home-growers often acquire their seeds and clones in the gray market, they also frown upon the low-quality flower that is virtually ubiquitous within the unregulated market.
The medical niche spearheads the industry, and a disproportionate share of its cutthroat competition occurs in the increasingly corporate segment. THC-flower competes directly with tinctures (i.e., magistral formulations), and the inexpensive formulations compete directly with registered products backed by clinical trials. Likewise, cannabis products compete with various painkillers, including opiates and other high-cost products which generate substantial revenue for big pharma companies.
To this point, skirmishing over the medical market has unfolded in fairly predictable ways. While producers of oils and flower advocated for improved patient access, rights, and affordability, companies aligned with Big Pharma and with registered products have rallied in the name of evidence, efficacy, and patient safety. A pioneering firm, GW Pharma reaped early and immense benefits through its pharma strategy and the strong sales of its two flagship products, Sativex and Epidiolex. Still, it seems likely that GW will lose some market share as global access to flower and tinctures continues to increase.
In the medical segment, entry barriers remain an expectation for any business model. For a long time, Big Pharma has leveraged various regulatory regimes to its advantage by fostering complexity and expanding technical requirements to prevent small players, manufacturers of generic drugs, and nutraceutical firms from penetrating medical markets. Similar entry barriers were also deployed against cannabis companies to delay popular adoption of cannabis products. More recently, large cannabis companies which manufacture tinctures used the same playbook to prevent flower producers from entering the medical market. Taken together, the competitive interactions puzzled regulators, causing frustration among Latin American patients who still face difficulties accessing cannabis products in medical markets.
Best Opportunities: Adult-Use Markets
Adult use constitutes the third and perhaps most interesting segment. Most of the knowledge about adult markets comes from North America, particularly from the states of Colorado and California where reliable data has been available for more than a decade. Undoubtedly, the opportunity to sell flower, vapes, edibles, and tinctures to registered adults constitutes a magnificent opportunity for wealth creation, democratization, innovation, social justice, and tax collection. Yet, some medical cannabis firms and Big Pharma companies strongly oppose the creation of adult markets. By eliminating some of the entry barriers, adult-use cannabis markets actually level the playing field while constituting an emerging threat for some medical products.
Unsurprisingly, lobbyists in numerous countries spend a great deal of effort and resources trying to dissuade policymakers from regulating their adult-use markets. Consequently, cannabis reform often occurs via public referendum rather than through the legislative process. However, soon that combination of forces could tip the balance in favor of consumers when the next large country adopts an adult use market. For now, the frontrunners appear to be Mexico or Germany, though another country could seize the initiative.
The fourth segment in the space is the illicit market. It receives comparatively little attention since most of the illicit trade in cannabis flower occurs regionally, and large crime organizations focused their efforts on other products years ago. Still, the illicit sector comprises more than 95% of the cannabis market, and remains highly profitable. While in Europe the illicit market surpasses $79 billion USD, in Latin America the market is estimated at worth beyond $12 billion USD per year. Only Uruguay and Canada have so far managed to establish national adult-use markets: their experiences indicate that the illicit market is resilient, and that it takes time for legal markets grow accordingly.
What should regulators do to promote the cannabis industry?
The answer seems straightforward: Policymakers should support licensed firms to help them compete against the unregulated, illicit market. The most important objective for regulators is to enable and monitor adult-use markets. The more that licensed firms can sell their flower, edibles, and vapes to increasingly capture their shares of the existing markets, consumers will become accustomed to better products and choices, and governments will ring up their anticipated tax revenues.
How might entrepreneurs best promote the growth of the cannabis sector?
Firms, stakeholders, and activists in turn should pay close attention to regulators, special interests, and the flow of investment. Only industry insiders stand to assure that regulatory frameworks do not get derailed. Worldwide, regulatory roadblocks have appeared to illustrate the key dynamics, and while six or seven years ago the legislative process was not well understood, that’s no longer the case. As suggested in New Frontier Data’s Global Cannabis Report, opportunities abound for those cannabis entrepreneurs who understand and identify market trends, navigate complex regulatory frameworks, and ultimately give consumers what they want while boosting further demand.