[Canniseur: I have to wonder how accurate this poll is actually. My “n” while admittedly small, has encompassed at least 8 states where adult cannabis use is legal. I have found the numbers of people are skewed older, meaning 50 or so and up. I’ve done my little survey on all days and at all times of the day, so it can’t just be the younger skew isn’t represented. Yes, there are lots of young people, but there are more older adults as well and it’s far greater than 15% stated here! Are moving into a time of fake cannabis news?]
Putting aside the growing pains that the marijuana industry has encountered over the past year, it’s still expected to be one of the fastest-growing industries on the planet over the next decade. Though estimates are all over the board, Wall Street is looking for annual weed sales to catapult from $10.9 billion in 2018 to between $50 billion and $200 billion worldwide on an annual basis by 2030. This is why North American pot companies have aggressively expanded their capacity, and why investors piled into marijuana stocks over the years.
However, not all growth in the marijuana space is necessarily the same. Statistics show that there are certain demographics that cannabis companies are going to want to pay especially close attention to. In fact, there’s one marijuana-use statistic that stands head and shoulders above the rest.
The one cannabis-use statistic you need to know
In July 2019, Gallup released its latest breakdown regarding what percentage of Americans smoke marijuana. Considering that a record-tying 66% of Americans want to see marijuana legalized, and the U.S. is projected to be the largest cannabis market in the world by annual sales, the data contained within this national survey is invaluable to weed-based companies.
Though the confidential national usage rate has remained fairly steady between 2015 and 2019 (it was 12% in 2019), it was the age breakdown of the usage statistics that cannabis CEOs are really eyeing. When broken down by age, the 2019 marijuana-use rate in the U.S. was as follows:
Age 18 to 29: 22%
Age 30 to 49: 11%
Age 50 to 64: 12%
Age 65+: 3%
On one hand, there’s no surprise here that older Americans are less likely to be regular cannabis users. Seniors have historically had a more adverse view of cannabis than younger adults, so this data provides even more evidence to this fact.
But what really stands out is just how many younger adults regularly use marijuana. Based on this survey, young adults are pretty much twice as likely as millennials, Gen X, and late-born boomers to use cannabis products. Not only does this mean that younger adults are the future and would-be focus on the marijuana industry, but it’s important to note that young adults are also considerably more likely to use higher-margin derivatives, such as edibles, vapes, and infused beverages, than older adults. This makes younger consumers an important cog to the future profitability of cannabis stocks.
Image source: Getty Images.
Investors will want to know these three derivative-focused marijuana stocks
While there’s no doubt that every single marijuana stock throughout North America will be focused on producing a number of high-margin derivatives targeted at this burgeoning younger base of consumers, there’s a trio of names you’ll want to follow especially closely when it comes to derivative production.
In my view, it’s basically a no-brainer to consider extraction-services companies, such as MediPharm Labs (OTC:MEDIF), The Valens Company (OTC:VLNCF), or Neptune Wellness Solutions (NASDAQ:NEPT). These are companies that take cannabis and hemp biomass and process it to yield the resins, distillates, concentrates, and targeted cannabinoids used in the production of high-margin derivatives. Not to mention, extraction-service companies may also offer white-label service and production, thereby reaching the consumer on a more direct basis.
MediPharm Labs and Valens are both solely focused on the Canadian market, which has shown similar marijuana-use rates among younger adults. MediPharm should ultimately have 500,000 kilos of peak annual processing capacity, with Valens aiming for 1 million kilos per year on a run-rate basis. The thing is, both companies began processing hemp and cannabis biomass a little over a year ago, but they’re already generating no-nonsense profits on a quarterly basis, without the aid of one-time benefits.
If you want a more U.S.-focused processor, then Neptune Wellness Solutions would be the better choice. Through its acquisition of SugarLeaf in 2019, Neptune boosted its peak annual run-rate processing capacity from 200,000 kilos (in Canada) to about 1.5 million kilos. SugarLeaf’s 24,000-square-foot facility in North Carolina should be a long-term boon for Neptune.
While growers do provide a more direct investment opportunity in the cannabis space, extraction companies are at the heart of the derivative movement — a movement that speaks loudest to young adults.
Yes, there are short-term risks associated with derivative pot products
On one hand, there’s little doubt that derivatives are going to represent a major growth driver for North American cannabis companies over the long run, and that young consumers are the future of the cannabis industry. But this doesn’t mean that there aren’t risks in the short term.
In Canada, supply issues have, and will continue to be, a persistent problem. Since traditional cannabis flower sales commenced in our neighbor to the north on Oct. 17, 2018, supply shortages and/or bottlenecks have been ongoing. These supply problems have been especially notable in Ontario, the country’s most-populous province. Having initially operated with a retail license lottery system, Ontario only opened 24 dispensaries by Oct. 17, 2019, the one-year anniversary of recreational weed sales. That’s approximately one store per 604,000 people, which is far too few for a province of its size. Even with changes in place, it’ll be a while before there are sufficient retail channels in place throughout Ontario (and Canada) to reach consumers.
Meanwhile, in the U.S., high tax rates in select recreationally legal states have made it virtually impossible for legal producers to compete with black-market products. For example, California, the largest marijuana market in the world by annual sales, saw its cannabis revenue decline by $500 million in 2018, the year that adult-use weed sales commenced. Since derivatives sport even higher price points than traditional dried flower, the gap in pricing with black-market products is even more pronounced.
While there are resolutions to the issues the North American cannabis industry is contending with, it’s going to take time for these fixes to take shape. That means patience is needed by investors as marijuana companies work through these early stage growing pains.
[Canniseur: Beer sales in Canada is hurting. Is it because of cannabis? For comparison, you look at a few of the adult legal states in the U.S. The answer might appear to be “No.” In Colorado, beer sales actually went up in January. A lot. Perhaps it’s because beer with more than 3.2% alcohol can now be sold in grocery stores, but that shouldn’t account for the huge increase in beer sales. We’ll have to take a look at the numbers in Colorado next January. The jury is still out on cannabis hurting beer sales.]
Canada’s beer business is looking a little flat.
The industry experienced its largest drop in sales in seven years in 2019, with domestic and imported beer purchases falling by 3 percent from the previous year, according to Marijuana Business Daily.
Domestic beer felt the brunt of the decline, with sales dropping in each of the final eight months of the year and in 11 out of 12 months in 2019.
Sales in December stood at 68,000 hectolitres (hL), down 4 percent from the same month in 2018. Marijuana sales, on the other hand, have been moving in the opposite direction.
While the country’s cannabis industry has fallen short of the lofty projections initially touted by analysts, a report by Statistics Canada shows that some $907.8 million worth of regulated cannabis was sold online and in retail stores between October 2018 and September 2019.
More cannabis was sold in Ontario than any other province or territory, totalling $216.8 million. Alberta, the province with by far the most stores, sold $195.7 million, just edging out sales in Quebec.
FILE – It was a busy opening day for Ottawa licensed cannabis shop, Superette, located on Wellington St in Ottawa.
Recreational cannabis more than doubled from $53 million in November 2018, to $135 million by the following November.
It was a trend that beer manufacturers foresaw when they began cutting deals with cannabis producers to infuse their beverages with the popular plant in a bid to reap the rewards of the emerging industry. But the creation of a new line of elevated beverages has proven more complicated than anticipated, and companies such as Canopy Growth have been forced to delay the new offerings, to the frustration of shareholders and eager consumers alike.
It’s also likely why Constellation Brands inserted itself into Canopy Growth’s affairs last summer. This coming year, the company will make its influence felt even more, by tightening operations and making sure its US$5.1 billion investment in Canopy will one day pay off.
With the Canadian market for edibles and infused beverages expected to take up around 12 percent of the market by the end of the year, things may get worse before they get better for brewers.
“A thorough strategic review is underway,” said David Klein, former chief financial officer of Constellation Brands who took over as Canopy Growth’s CEO last month. “We will rightsize our business over the next 90 days … in a thoughtful and measured fashion,” Klein said.
With the Canadian market for edibles and infused beverages expected to take up around 12 percent of the market by the end of the year, according to data firm Headset, things may get worse before they get better for brewers who played it safe and stayed on the sidelines.
[Canniseur: There are some surprises in here. Since there are so many ways to measure the ‘most’ dispensaries, there are a few different metrics on this. How many dispensaries per 100,000 people are there? How many dispensaries total are there. I believe the authors missed it because there are 26 listed dispensaries (adult-use) in Trinidad with a population of 8,200 to 8,300 people. That works out to ~319 people per dispensary. That’s a very low number.]
The city with the most dispensaries based on its population figure is Missoula, Montana.
When most Americans pass by a store selling liquor, beer, or wine, they barely think twice about it. That’s because its existence isn’t novel; we all know plenty of folks who drink and buy alcohol. Outside of a few select cities, seeing a marijuana dispensary on a street corner still causes heads to turn.
Anecdotal evidence and analytics paint a different story about how often an individual might witness a dispensary in their city. Los Angeles and Seattle might seem like obvious choices to an outsider, as they are the biggest cities in states well associated with recreational marijuana. But neither city ranks among the top 30 cities with the most marijuana dispensaries per capita, according to Verilife data.
The city with the most dispensaries based on its population figure is Missoula, Montana. Cities following Missoula with most dispensaries per capita all come from Oregon and Colorado, as you might expect: Medford, Pueblo, Eugene, Denver, Portland, in that order.
When it comes to which state holds the top spot for dispensaries per capita, it’s Oregon. But the following two states on the list aren’t California or Massachusetts — they’re Oklahoma and Montana, respectively.
Oklahoma has 15.6 dispensaries and Montana has 15.1 dispensaries per 100,000 people. Oklahoma only legalized medical marijuana in summer 2018 but the state has been flooded with dispensaries almost immediately. That doesn’t mean all those dispensaries are making that much more money for the state.
“It’s interesting to note that while Oklahoma has the most marijuana dispensaries per capita, it has generated the least amount of tax revenue from cannabis out of all the states where marijuana is legal,” Verilife analysts wrote. “The state is home to nearly 600 dispensaries but generated only $70,000 from marijuana in 2018.”
To no one’s surprise, California raked in the highest tax revenue through marijuana sales. In 2018, California accrued $345 million in marijuana tax revenue. Washington and Colorado were close behind, with $319 million and $266 million respectively. What will be interesting to see is if states that recently legalize marijuana will continue to house so many dispensaries, or if the lack of revenue will balance the equation out in years to come.
[Canniseur: Couldn’t agree more. Cannabis flower has become too potent. It reminds me when the wine industry in California started taking off and people were making wines with as much alcohol as they could before the yeast died. A 17% Cabernet is not a pleasant wine. Why should cannabis be any different? It’s relatively easy to grow cannabis with high THC. The only thing I don’t agree with in this story is the “LiteBud” branding. I think a big brewing company will have something to say about this.]
Getting a high from using tetrahydrocannabinol (THC) is one of the key reasons people use marijuana. But the potency level of THC has been rising quickly over the years, and pot is much stronger than it was in the past. However, not everyone is looking to get as high as possible, and that’s why there could be a more prominent trend among casual users: “lite” bud.
Company launches “LiteBud” brand
In January, Vireo Health (OTC:VREOF) announced it was launching a brand of products dubbed “LiteBud” in an attempt to meet the needs of consumers looking for a buzz as opposed to getting downright stoned.
One of the dangers for new marijuana users is that THC levels can be very high and lead to some bad experiences and unwanted side effects. Rather than producing a calming effect, high THC levels can lead to panic attacks and increase a person’s paranoia and anxiety. For people consuming marijuana for the first time, this can create a negative experience with pot and put people off cannabis right from the get-go.
The THC percentage, which is the THC content as a percentage of the flower’s dry weight, indicates how potent the cannabis product is. From 1995 to 2014, the Drug Enforcement Agency saw THC potency levels rise from 4% to 12%. Today, however, it’s possible to find products that have THC levels of more than 25%.
Why there’s a need for low-THC products
Cannabis users don’t need high levels of THC to get a high or the calming effect they’re after. And that’s where a “lite” product may have a broad appeal. A less potent product may help users avoid unexpected side effects. Delivering a positive, consistent experience can be key to attracting and keeping new cannabis users.
Relying on potency to evaluate marijuana also may not be ideal, as THC percentages can often be inaccurate and inflated. Different testing labs in different states test cannabis using varying methods and technology, and thus some of those highly potent marijuana products may not be as potent as users expect them to be.
Without standardized testing procedures across the country, there’s plenty of room for discrepancies to take place. That’s an additional reason why mainstream cannabis consumers may not have an incentive to seek out high-THC products. Not only could the effects be adverse, but the potency levels may not be as advertised.
What does this mean for investors?
Vireo’s executive chairman is former Canopy Growth (NYSE:CGC) CEO Bruce Linton, who knows a thing or two about the cannabis industry. And for a large cannabis company like Canopy Growth to be successful and reach a wide audience, it needs to offer a variety of products, including ones with high and low levels of THC. It’s a way for a company to hedge its bets and see what’s popular with consumers and what isn’t.
The edible and ingestible market, also known as “cannabis 2.0,” officially opened for business in Canada in October 2019; Canopy Growth announced in September that it had 50 products it was working on for the new segment of the market.
Canopy Growth’s focus on offering many products in many different parts of the world has helped make it a strong brand. It even has a deal in place with Acreage Holdings that’s ready to go once cannabis is legal federally in the U.S.
When choosing a marijuana stock, cannabis investors should consider the breadth and depth of the products companies offer to see if they’re overly dependent on one particular niche or segment of the market. A company with those qualities could make it a much riskier investment. Investors shouldn’t be surprised to see more low-potency options hit the cannabis market in the future.
[Canniseur: Why are bureaucrats always wrong about how much product will be needed for an adult-use cannabis market. This describes what’s going on in each and every state that has legalized cannabis for adult use. When there’s no product in an adult legal state, where does the money go? Why the black market, of course. Are the regulators idiots or just unaware of the consequences of their actions? I do not believe they’re idiots, but in many ways, they’re behaving like they don’t understand what’s going on in their own states.]
It seems that whenever a new recreational cannabis market rolls out, reports of exaggerated lines, product shortages, and store closures never seem to be far behind.
The primary cause of these cannabis shortages is a lack of production capacity, although that in itself is quite vague. Business owners in states that have an existing medical cannabis market often find themselves overwhelmed when it’s time to make the necessary changes required to transition into the recreational scene. These often include additional licensing, which can be financially prohibitive, as well as possibly having to relocate due to certain zoning issues, hire and train new staff, and a number of other changes.
Regardless of the reasons, cannabis shortages put additional stress on business owners and consumers alike. That said, let’s take a closer look at what’s been going on in North America, with Illinois being our key sample area.
The newest recreational program to launch in the United States is Illinois, with legal sales starting on January 1, 2020. Almost immediately, reports of long lines began popping up online, with people claiming to wait hours in cold temperatures as lines to get into dispensaries wrapped around the buildings and through parking lots.
After only one week, many businesses had already run out of cannabis, and these shortages are expected to last six months to a year or more. The reason for this? Despite having planned this launch for quite some time, and despite the fact that cannabis use is becoming increasingly mainstream, Illinois only authorized 21 cultivation centers to supply the state. This is far fewer than most other states with legal cannabis.
This problem was seen in just one month prior in neighboring Michigan, when legal sales opened up on December 1, 2019. The limitations on the number of growers is partially based on the assumption that existing medical growers in both states could supply the new recreational market – although studies from older markets predicted that would not be the case.
For now, some retail owners are delaying recreational sales until they can guarantee a reliable supply, a move that can have a devastating impact on their bottom lines.
The West Coast is home to the largest cannabis market in the world, California, as well as one the first adult-use markets, Washington. The region has a long history with progressive cannabis reform and lenient views on recreational use.
However, that doesn’t mean that these areas are immune to cannabis shortages. The problem hit California when the state changed their laws and required growers and dispensary owners to meet a number of new standards (mostly lab testing and licensing). Reports of increased testing wait times and testing failures caused widespread product shortages. This lasted until labs were able to expand capacity and growers were able to meet the new requirements, which for some meant waiting until their next harvest.
California struggled with supply issues when farmers were forced to adhere to new testing standards
When Washington began selling recreational cannabis in 2014, there were only about 20 stores and 80 growers licensed to serve the entire state. This led to statewide flower shortages and prices skyrocketed as consumers tried to get their hands on the minimal supply that existed.
Many were convinced that Washington’s program had failed, but after a thorough expansion, the state now has 1,100 and close to 500 stores. Prices have been steadily dropping since 2014 and they seem to have leveled out at around $150 for an ounce.
Our neighbors to the North struggled with this dilemma after their October 2018 launch as well, with some stores running out of buds within hours of opening. Also stemming from cultivation issues, the Canadian shortages lasted over a year and are just now beginning to level out.
Many licensed growers ‘over-estimated their ability to produce cannabis at scale’. For example, some may have promised 1,000 kilos but were only able to deliver 200-300 that was good enough quality to sell in dispensaries.
This was a very common problem across the industry as top shelf cannabis – the quality that many consumers have begun to expect – is very difficult to grow to scale. Many also just didn’t expect it to be as popular as it turned out to be. The demand was tremendous and it wasn’t from the anticipated demographic. More women, parents, and elderly people are using cannabis for a variety of different reasons – something officials in Canada were just not ready for.
Many supply problems start at the root of the operation
As you may have noticed, most of these delays start at the level of cultivation. Although not necessarily the fault of the growers themselves, there are a lot of factors at play that can make it difficult to produce large amounts of high-quality, legally-compliant flowers.
For example, it took Illinois growers months to get permission to expand their cultivation centers. Many didn’t get their licenses approved until December 23rd, only one week before recreational sales were slated to begin. Experienced growers note that it can take over a year to go through the entire process of getting permits, building or expanding a warehouse, and actually producing a crop.
According to Beau Whitney, senior economist at New Frontier Data, Illinois other new markets aren’t expected to reach full supply for around two years. “You fix it by issuing additional licenses,“ he said. Until then, he added, “look for continued constraints on supply, higher-than-market prices and a robust illicit market.”
Another problem is the amount of space issued to new applicants. Many were limited to only 5,000 square feet of growing space, while existing growers could utilize up to 210,000 square feet. Smaller growing operations – or microgrows – are known to produce much higher quality cannabis. Canndescent in Desert Hot Springs, CA, is one company that’s capitalized on this discovery.
However, farmers wanting to produce larger amounts of boutique-style cannabis should opt for an expansive warehouse broken up into smaller, microgrowing areas. Until then, growers will just have to make do (and get a bit creative) with the limited amount of space the currently have.
Skyrocketing Demands Hit A Brick Wall
Demand for legal cannabis during Illinois’ first recreational week was among the highest of any state, with a total of $20 million worth of product sold in the first 12 days. Even before adult-use sales started on new year’s day, medical cannabis patients were stocking up and buy most if not all of the inventory at local dispensaries, in anticipation for the coming wave of shoppers.
It’s important to note that these inventory shortages only applies to recreational cannabis. Illinois marijuana czar Toi Hutchinson pointed out that dispensaries are required to have a one-month reserve of inventory for medical cannabis patients, to ease their growing concerns about not being able to find the products they want.
To maintain supply and keep the doors open, recreational stores are limiting the amount of cannabis customers can buy each day or week. Take Chicago’s Mission Dispensary, for instance, which imposed a $200 maximum spending limited, broken down to 4.5 grams of edibles, up to 100 milligrams total in edibles, and two vaping cartridges.
One of the chief sponsors of the law, Illinois state Sen. Heather Steans, said these shortages come as no surprise, based on similar patterns in other states. “Hopefully, within six months or a year or two, the supply gets ramped up so you’re not having the same challenges,” Steans said. “There’s an initial burst of excitement from the public, so some of it is the nature of the beast.”
Some people are more optimistic though, like executive director of the Cannabis Business Association of Illinois, Pam Althoff. She expects legal growers to meet demand and level out the market by May. “There’s always bumps with new things, but I think it’s going extraordinarily well,” she said.
Other states that have seen these scarcities, also saw the market regulate fairly quickly – sometimes in just a matter of weeks. Brian Smith, spokesman for the Washington State Liquor and Cannabis Board noted that, “There were a lot of people overreacting to how we got started,” indicated that the problem of shortages wasn’t nearly as bad as the media made it seem.
In The Meantime…
For now, there isn’t much that can be done to mitigate supply issues, long wait times, and fluctuating prices. For consumers, many would advise shopping on Monday and Tuesday afternoons to avoid wait times, although there’s no guarantee that they will actually find what they’re looking for, even if they get into the shop quickly.
“You definitely get a little grumbling, ‘I waited in line for an hour and all I could buy was this much,’ ” says Kris Krane, co-founder and president of 4Front Ventures. “But most people are just happy they can come into a store and buy legally. They’re willing to abide by these minor pains. People might be more upset three or four months from now (if cannabis shortages continue). But we can’t grow the plants any faster.”