Innovation in the Cannabis Industry
By Esteban Rossi I., Ph.D., Analyst, New Frontier Data
Despite established and expanding popular support, increased sales (in some jurisdictions) and significant social benefits, the Latin American cannabis industry is evolving more slowly than anticipated. Arguably, the various dynamics of the policy process make it inherently slow, clashing with the requirements of innovation. Meanwhile, cannabis companies struggle trying to increase sales, and patients complain about the barriers to obtain high-THC products. New Frontier Data illustrates the delays in policy processes, and identifies the requirements for market creation. As always, the data used can be found in the current Global Report and New Frontier Data’s business intelligence platform, Equio.
The Bubble
Canada stirred interest in the international cannabis industry in 2018 after bill C-45 was founded, and investment bankers soon began making initial public offerings (IPOs). Consequently, bankers, entrepreneurs, and the media were heavily incentivized to pump stocks rather than set sound foundations for a new industry. The consequences of the oversight were severe: In less than two years, company valuations became impossible to justify, sales projections were rendered meaningless, and numerous companies found themselves with an embarrassing balance sheet given considerable infrastructure and few ideas for the future. Investors, in turn, found that the dominant narrative outlining an enormous and accessible market was simply wrong.
Because of the timing and the political context, the Colombian industry adopted numerous elements of the Canadian regulatory model. Those similarities allowed Colombia to attract $288 million USD in foreign investment. Yet, industry pioneers faced operational challenges, underestimated the importance of the regional market in their business plans, and often misbehaved while trying to shape the regulatory process in their favors. Most importantly, after a couple of years trying to market their products, LatAm-based companies found that the narrative pushed by Canadian bankers did not fit the facts.
Cannabis enthusiasts must remember that recent history to make sound investment decisions. Fortunately, the pendulum is moving away from story stocks, and back towards fundamentals. Now solid data exists to describe what consumers, patients, and regulators really need and can pay for. It also helps to illustrate the barriers that hinder market formation and growth.
Barriers to Innovation and Market Creation
The first challenge for the cannabis industry is to win public approval. The public at large remains poorly informed of the health, economic, and security benefits of cannabis legalization. The public conversation requires time, and cultural understanding. After four decades of prohibitionist policies, many people (particularly older generations) are understandably somewhat confused if also curious about the consequences of legalization. Cannabis patients, consumers, and their families will play prominent roles in the dialogue.
The second challenge consists in securing the political will for reform. For strategic reasons, traditional policy makers tend to distance themselves from legalization efforts. Understandably, difficulties exist and circumstances could go wrong, thus it is easy for opponents to misrepresent legalization efforts and taint a candidate’s image. Moreover, large economic interests compete for segments of the cannabis market, and provoke regulatory delays. A large set of health-care regulations enacted for consumer protection can gradually become de-facto entry barriers protecting incumbents and hindering innovation. The result: rather than acquiring local and tested products in legal markets, local consumers currently purchase CBD tinctures at the corner store, and THC products from a local dealer or an online vendor.
A third challenge lies in the implementation of the regulations. Each Colombia (e.g., Invima), Argentina (Reprocann), and Mexico (Secretaria de salud, Conadic) established a legal framework for medicinal cannabis, yet policymakers were unable to establish the regulatory capacity to foster the local industry. Over time, competing demands and scarce public funds pushed medicinal cannabis down respective priority lists. Alternatively, a government can set up an independent regulatory agency tasked only with cannabis regulations, and use license fees to ensure that the agency has the resources to cover its expenses. Both Uruguay (IRCCA) and Jamaica (CLA) obtained good results with this approach.
Industry Members’ Next Steps
As popular support for reforms continue to grow, the cannabis industry must ensure that the public as a whole (i.e., political leaders, minority groups, and the medical community) recognizes and understands the importance of regulations while effecting major transitions in consumption patterns, well-being, aging, and health care. The educational challenge currently shouldered by NGOs and growers’ associations demands consistent efforts and patience.
For entrepreneurs and business owners, it is perhaps worth a return to basics, from first securing access to consumers, then moving backwards along supply chains. Presently, international flower markets remain small or restrictive. Domestically, cannabis firms should push regulators to set up dispensaries or pharmacies focused specifically on cannabis. The distribution channel — as thoroughly tested in Uruguay, Florida, and Colorado — is easy to monitor, and very profitable. Once again, the solution entails going back to the basics and selling quality flower directly to consumers.
For angel investors, the young industry remains promising and filled with opportunities (see chart). New Frontier Data recommends identifying and analyzing cash flows, sound products or technologies, lean approaches, operational milestones, and specific client bases. In general, investors might be wary of firms controlled by Canadian capital, business models predicated on large export markets (B2B), or expensive staffs peopled with experts from other sectors. It is also important to note that in 2020 sales in the Latin American cannabis market comprised $12 billion USD — mostly from illicit sources.
For regulators, it seems time to develop bold international agendas. As the European market continues to evolve, numerous opportunities will emerge in the old continent. Export agencies like Procolombia and Proecuador should follow the approach developed by Uruguay XXI, and open new markets for Latin American cannabis in Europe. It will be a tall order but crucially important.
Recently, small jurisdictions like Luxemburg and Malta took major steps to regulate their domestic markets and attract consumers and investors. Those countries (with small bureaucracies and ambitious leaders), possess prime opportunities to innovate while passing bold cannabis legislation. Over time, such advances should inspire other countries and build momentum. Moreover, in Germany the new coalition government has expressed interest in expanding access to cannabis, perhaps through the regulation of adult-use cannabis. Since Germany’s regulations are actively being written, it would be a good time to expand distribution channels from Latin America while securing some space in Europe’s largest legal market.
