Chapter 1: Overview of the Marijuana Industry
In the 1930s, a film to show the harmful effects of marijuana was released to the public. The film, titled Reefer Madness, was originally considered educational material. It was used by the public to raise awareness of the effects of marijuana. Eventually, as people began to change their attitudes about pot and with science releasing numerous research and studies based on cannabis, the movie turned into a piece of satire.
The above situation is especially true when science itself proved the medicinal benefits of marijuana. While it is still considered a controlled substance under federal government guidelines, it has come a long way from being included in the illicit drug category. Now, the stigma surrounding marijuana is changing at a breathtaking pace, and it won’t be long before it becomes more widespread in the mainstream.
With its current status, numerous consumer cannabis product retailers and companies are already evolving to meet growing demands. One of the important reasons for such growth is that cannabis is not just restricted to bongs, pipes, or joints. There is a whole market dedicated to a variety of cannabis-based products, including topicals, infused products, and concentrates. Each product available in the market addresses the demands made by the modern consumer – that of ease of use, accurate dosing, and variety. Moreover, to meet the growing demands, companies and retailers are making use of unique advertising techniques and packaging. Cannabis products are not always handed over in simple baggies anymore. Manufacturers spend increasing amounts on the presentation of the product.
But I would like you to think about that for a second. Why would there be so much variety for a product that is not in high demand?
Products that are infused with cannabis often contain cannabinoids or other active components from the cannabis plant. Therefore, the products are fused with certain concentrates, allowing them to be sold on their own or, in some cases, as a combination with other products. For example, butter filled with cannabis can be sold on its own or as part of another product, such as cannabis cookies.
All of these innovations are significant because marijuana is now being used to cater to a huge market. A market that has its own tastes and preferences.
But to understand the market, we need to delve into it in more detail.
The cannabis market is forecasted to grow at a compound annual growth rate, or CAGR, of at least 32.6% from 2019 to 2026.
So what exactly is CAGR?
The term refers to the rate of return that is required to ensure that an investment is going to grow from its starting balance to a fixed balance in the future, also commonly referred to as the ending balance.
A CAGR represents the rate at which an investment rises if it had the same level of growth in the previous year, and the profits earned were reinvested at the end of every year until we reach the ending balance.
Let’s see how CAGR works through an example.
Assume that you have $10,000 that you invested in a stock or any other market security.
Over the course of three years, your portfolio looks like the below:
● From January 1, 2015 to January 1, 2016, your portfolio grew to $14,000. This is an increase of 40%.
● From January 1, 2016 to January 1, 2017, your portfolio rose to $16,000, or an increase of 14.29%.
● From January 1, 2017 to January 1, 2018, your portfolio rose to $20,000, or an increase of 25%.
If an investor looks at the above numbers, then he or she might think that the increase in the second year was low, and it picked up by a small margin. However, it still hasn’t risen above the first-year standards. He or she might become skeptical about market security and make future predictions based on his or her understanding of the market.
That’s where CAGR comes in. It ignores the drastic changes between the years and focuses on the bigger picture.
It uses this formula:
CAGR = (Ending Balance/Beginning Balance)⅓ - 1.
When we plug in the values and convert it into percentage form, we realize there is a compound annual growth rate of 33.3%. This value helps investors understand what they can expect from the stocks in the future. For example, if they realize that 13% is a robust CAGR that gets them their return with a little profit, then anything above that is optimistic.
A robust CAGR for the marijuana industry is around 14.5%. However, as we had seen earlier, its actual CAGR is 32.6%, well above optimistic results.
One might ask: so what exactly is driving the cannabis market?
The pivotal factors that drive the cannabis market are the research studies conducted on marijuana, particularly those that have proven marijuana to have various medicinal properties.
It is for this reason that marijuana is more widely spread around the world for medicinal purposes. But the more it is used in the realm of medicine, the more doctors and health professionals have the opportunity to personally attest to its degree of harmlessness for recreational use. This, in turn, boosts the confidence of the government in legalizing marijuana. The countries that are currently using cannabis for medicinal purposes legally are:
We are excluding countries such as Canada, the Netherlands, and the United States since all or many parts of the countries allow marijuana for recreational usage.
The North American cannabis industry is set to dominate the market, mostly because of the fact that Canada had legalized the use of cannabis for recreational use in 2018, making it the first G7 country to do so. In the United States, with 33 states legalizing marijuana for medicinal use, the market has improved even more. Among the 33 states, Washington, California, and Colorado have the best-selling cannabis products in the entire country. This is an additional boost to the overall cannabis market since California also happens to be the most populated state in the US.
Major Developments in the Cannabis Industry
Here are some of the major developments that have happened in the cannabis industry in the past two years.
In September of 2018, LATAM Holdings, a cannabis venture situated in Canada, was acquired by Aphria Inc. This move provides the acquiring company access to countries in the Caribbean and South America, such as Brazil, Jamaica, Argentina, and Columbia. The main aim is to show the government of the countries the profitability of cannabis, persuading them to enact better legalization laws in their respective countries. This will further increase the marijuana market, as South American and Caribbean countries have low cannabis market growth, as seen in the diagram below.
All the countries that have a darker shade, including South America, Africa, various countries in the Middle East, and other countries all have low cannabis market growth.
In October of 2018, Ontario Long Term Care Association, which is the largest association of long-term care providers in Canada teamed up with Spectrum Cannabis to find out how effective cannabis can act as a potential source of medicine for preventing the breakdown of cognitive functions. Could this be another milestone set by Canada that will improve worldwide perception about cannabis? Only time will tell.
Demand for cannabis has encouraged companies to innovate even more. This has caused cannabis manufacturers to produce more value-added products, including oils, gels, and extracts. The whole phase of innovating products has been nicknamed “Cannabis 2.0” and is also marked by other additions, such as cannabis-infused vaporizers and beverages.
The growth of the cannabis industry can also be seen in smaller companies, which have moved up the value chain to become profitable prospects. Some of these smaller companies become attractive opportunities for bigger companies. For example, Verano Holdings was acquired by Harvest Health for a little over $850 million, which is considered the biggest deal in the pot industry in 2019. Following the example of Harvest Health, Cresco Labs shelled out $825 million to acquire Origin House. The fact that even small-scale companies are valued at hundreds of millions of dollars might give you an idea of how big the cannabis industry has grown to become.
The Agriculture Improvement Act of 2018 in the United States has allowed for the production and distribution of hemp. Industrial hemp, which is simply referred to as hemp, is a variety of the cannabis plant. Hemp serves a wide variety of purposes, from proteins to fiber to smokable portions. They can be used to make building materials, furnishings, fabrics, clothing, and paper. While hemp and marijuana are both cannabis, their chemical makeup is entirely different. Marijuana, when smoked, can give the effect of getting “high,” while hemp does not have the potency that marijuana does. However, the fact that it is now legal to grow hemp is a step further in the direction of progress.
Because of the growing demand of cannabis around the world, the cultivation of the plant has increased. The data below shows that the cultivation of cannabis has not just increased compared to the last decade, but it is projected to increase even more in the next two years.
While countries in Latin America and Africa have shown low market growth, they have become ripe for investment. One of the main reasons is that global cannabis manufacturers are looking to reduce the cost of production. To them, the Latin American and African regions provide the resources that they require at lower costs. The situation is also improved because of many governments enacting new laws to support cannabis production. For example, the Ministry of Justice and Law in Columbia created a new committee in 2019 to respond to cannabis licensing requests within 30 days. The growth of requests for establishing retail and production units in the country has increased to a point that it was far better for the government to have a separate establishment to deal with the requests. Furthermore, the Colombian National Council of Narcotic Drugs has increased the limit for cultivation. At 40.5 tons per year, they are aiming to meet the needs of as many cannabis producers as possible.
The “domino effect” of Canada’s legalization process has traveled farther east. In December 2018, Thailand introduced new rules to approve the use of medical cannabis, becoming the first country in Southeast Asia to do so. This move created a ripple effect and caused Malaysia, Guam, Japan, South Korea, and even the Philippines – which is currently in the midst of a nationwide drug eradication effort – to legalize the use of cannabis for medicinal purposes. Certain provinces in China and India have also gained momentum for allowing the use of cannabis in medicine under certain guidelines. The important thing to note here is that if the major provinces of China and India manage to create better legalization laws, then the cannabis industry has access to a large market.
The Cannabis Industry Update for 2020
But why wait for the next two or five years to see the growth of the cannabis industry? You can see the growth the industry is experiencing in 2020 itself. Creating an investment strategy now will allow you to plan better for the future. Here are some of the major updates of the industry.
The US legal cannabis market had grown to over $13 billion in 2019, from $10 billion in the previous year. This year, the market is poised to grow to $17 billion. Those numbers show a 30.77% increase in growth this year, as compared to 30% growth in the last year.
Switzerland and Luxembourg are on the verge of legalizing cannabis this year. Both countries attract millions of tourists every year. The move to legalize cannabis will open the pot industry to a wider customer base. Mexico is also set to legalize cannabis by the end of April. If it does manage to pass legalization laws before the deadline, then it might be the third country in the world to allow the use of recreational marijuana.
Cannabidiol, or CBD as it is commonly known, is the second most prevalent component of a cannabis plant. While CBD is an important ingredient in medical marijuana, it is mainly derived from the hemp plant. We have seen how the US has legally allowed for the cultivation of the hemp plant. With that decision, the production of cannabidiol will steadily grow. This move is important because while many regions don’t allow cannabis, they do allow products that are infused with cannabidiol, which range from food and beverages to makeup and skincare products.
The retail experience is going to improve this year, with a focus on “digital experience” to make retailers savvier. Customers can now have their preferences saved in the retailer database. So, the next time a customer visits the retail store, an update such as “Peter likes hybrid cookies” might already appear in the retailer’s systems, allowing the store to keep the customer’s purchase ready or update their existing purchases as necessary.
Market researchers are optimistic that the cannabis industry is going to grow by nearly twofold this year. You only have to look at the performance of Canopy Growth, the Ontario-based cannabis company and one of the largest manufacturers of cannabis products. Canopy Growth not only achieved a revenue of $96 million last year, which was a figure way ahead of industry estimates, but it also showed a 49% increase in sales over the previous year.
There were more than 9,300 active licenses for cannabis retailers and businesses in 2017, and the number is only showing growth. In 2020, that number is more than likely to cross the 10,000 mark, which is only going to improve the cannabis network.
Currently, many cannabis products are sold on the black market, owing to the lack of legalization procedures. However, if you take into consideration the entire market, then the market demand for cannabis is a jaw-dropping figure of $52.5 billion. This is one of the reasons why legalization procedures are gaining momentum; there is huge potential in the cannabis market. In fact, a fully legalized cannabis market can easily surpass the cigarette market, which is itself a $93.4 billion market.
When an industry grows, that industry provides better jobs in the market. Recent estimates of the marijuana industry have shown that the average salary per year that the industry offers is around $60,000. In 2018, the demand for jobs in the pot industry grew by 76%. In 2020, the growth is going to be even more significant because of the growth of the industry.