Ask Our Experts 07/08/2018
Q. In this emerging market with extraordinarily high potential, the U.S. has allowed Canada to get a major head start: Is this a death knell for the opportunity for the U.S. to become a leader in this market as it has done so successfully in technology?
A. The U.S. is indeed now facing an increasing risk to lose material positioning in a fast-developing international market, which in many ways is currently led by a faster-moving neighbor, Canada.
Canada is on the verge of becoming the first developed nation to launch a national legal, regulated cannabis market, in which worldwide cannabis investors have flocked into to capitalize on the significant growth opportunities that the market has represented to date.
The U.S.' ability to gain back ground and save its position in the global legal cannabis market will depend on a variety of till evolving forces and dynamics; from macro-economic regional maturation of new cannabis markets across Europe, Latin America, and Africa, to more microeconomic factors such U.S. state and federal regulatory progress.
- Larger U.S. population fuels significantly higher domestic demand. The U.S. has a population 10x that of Canada's. The total domestic market opportunity in the U.S. over the long term could dwarf that of Canada's as more American states legalize, and as federal prohibition eases. New Frontier Data forecasts that between 2018 and 2025 total domestic medical and adult-use sales in the U.S. (within currently legal states only) will top $136 billion, compared to $36 million in Canada over the same period.
That said, Canada's positioning to expand its Total Addressable Market by creating commercial links across Europe and Latin America, as well as these new market's speed of adoption, could shrink the gap between the two nation's market attractiveness, and provide Canada with a material market advantage.
- Wall Street capital drives market change. The cannabis industry remains in its infancy. Only about 20% of Americans live in states where adult use is legal, and many of those are living in municipalities which have placed bans or moratoria on cannabis businesses. This, despite approximately 10% of Americans regularly consuming cannabis. These restrictions, coupled with cannabis' illegality under federal law, have kept most institutional capital (and many private investors) out of the market.
Between 2016 and 2017, Canadian companies received nearly half of all global investments into cannabis companies, reflecting the high level of interest in the market. The rush of capital into Canada has helped push the value of Canadian LPs to unexpectedly high levels, making them the world's most valuable cannabis companies today.
That said, the amount of capital available from Wall Street and broader U.S. financial markets is a magnitude of order greater than what is available in Canada, providing the U.S. a unique, and time-sensitive, opportunity if and when funding, banking, and trading barriers fall.
- The U.S. state market model has led to greater product innovation. The U.S. model of limited, state-only legalization has made the state markets hotbeds of innovation, enabling thousands of small companies to flourish as they work on bringing the next generation of cannabis products and services to market.
The restrictions on interstate commerce have resulted in some inefficacy as it makes it very costly for plant-touching companies to expand across state lines. However, the large number of small operators has resulted in a much greater diversity of products, and myriad innovative approaches to solving the industry's various challenges.
In contrast, Canada, which is dominated by a small number of large companies, also features strictly mandated product rules which will likely result in much less and much slower innovation. This gives the hypercompetitive U.S. market a distinct advantage for propelling cannabis product development and innovation.
Whether the U.S. can effectively leverage its strengths remains to be seen, and it will hinge on how long it takes for federal prohibition to end. The longer it takes for federal rules to be relaxed, the stronger Canada's first-mover advantage will be. If more countries around the world legalize cannabis and welcome Canadian cannabis imports, the U.S. will face a steep climb to displace its northern neighbor on the global stage.