The Opportunity

The Canadian cannabis industry is looking forward to the legalization of edibles, extracts, and topicals.

A change in cannabis regulations scheduled for Oct. 17 2019 will effectively open the legal market up to dozens of new products.

Companies are excited to offer these products because they know consumers already love them.

In legal U.S. states, non-flower products are over 50% of sales and are increasing in market share by 4% a year. At this rate edibles, extracts, and topicals will command 70% of the market in five years.

These extracted products are also much more profitable than raw flower and will contribute to an increase in margins for licensed producers.

Marijuana edibles vs extracts vs dried flower infographic

The Challenge

The legalization of new cannabis formats could be a golden opportunity for the industry, but judging by an early look at proposed regulations, the government is determined to keep the Canadian cannabis industry from reaching its full potential.

In this article, we will explore four of the most glaring issues contained in the draft edibles regulations. If most of these rules are not amended before October, the Canadian cannabis industry may find itself at an insurmountable disadvantage in the coming battle for global market share.

1) Infused Beverages Must be Produced in a Separate Building from any Other Food

The government is requiring that edibles be produced in an entirely separate building from any other non-cannabis food products.

This rule would require contract food manufacturers and growers to build entirely new facilities instead of just walling off a segment of their plant to produce cannabis specific food.

Regulations that create significant unnecessary production costs for license holders will only lead to higher prices for consumers and a bigger mismatch between legal and black market prices.

It will also disincentivize new companies from entering the market due to the higher startup and operating costs, leaving less choice for consumers and higher costs due to a lack of competition among growers.

2) Labeling and Bottling Rules Restrict Beer Company Labels and Increase Bottling Costs

Alcoholic beverage manufacturers are explicitly restricted from putting their brand on an infused beverage.

This rule, above all, will put Canadian growers without a global footprint at a disadvantage when competing for outside investments from alcoholic beverage companies.

Ab Inbev, for example, is unlikely to commit to a more substantive partnership with Canadian producer Tilray unless Tilray establishes a meaningful presence in the U.S. where established alcohol companies are free to label infused beverages however they wish.

Proposed regulations around child-proof containers may mean pop tops, corks, and pry tabs are off limits, forcing the bottling industry to invest capital in entirely new equipment, an unnecessary cost.

In our opinion, forcing the Canadian industry to build cannabis drink brands from scratch and invest in expensive new equipment will increase prices and slow the adoption of these products among consumers.

3) THC Limits are an Environmental Concern and Make Products Less Appealing

As it stands today, each package can only contain a maximum of 10mg of THC. It doesn’t matter how many individual items are in that package.

This will lead to environmental waste as child-proof and tamper-proof packaging must apply to every single 10mg candy, not just a larger package filled with multiple candies.

Restrictions limiting infused beverages to 3 ounces, instead of the more common 12-ounce size will again lead to more package waste and increase costs for bottlers who need to retool or invest in custom equipment.

Low THC limits per package also put legal edibles at a disadvantage to the black market.

A consumer buying a legal candy bar may have to consume an entire bar to achieve the desired dosage, while a black market user can buy one bar that contains a 10 day supply of THC.

Forcing users to eat hundreds of extra calories to reach the proper dose is unlikely to spur purchases from heavy users who currently make up close to 70% of demand.

4) Ingredient Restrictions Make it Hard for Companies to Create Edibles and Drinks that Consumers Want to Eat

Regulators are planning to restrict the use of ingredients that could appeal to children in both edibles and infused beverage.

The problem with edibles is that by their very nature they have traditionally appealed to children, demonstrated by a recent $2 million drug bust in Ontario that was full of cannabis lollipops, gummy bears, and cotton candy.

Do these restrictions mean brownies, cookies, and candies will be restricted?

Edibles must also remain shelf stable without refrigeration, likely leading to products filled with more chemical stabilizers and lacking the same flavor of fresher products.

Legal products that cost much more, but taste the same or worse will slow the adoption of the legal market by black market consumers.

On the beverage front, companies are already struggling to make cannabis-infused drinks that don’t taste terrible, so limiting the ingredient options will make it harder for them to create an enjoyable product.

Initial edible restrictions are shaping up to put legal products at a significant disadvantage and slow the public’s transition away from the black market.

Bottom Line

At the end of the day, the government’s goal is to give the public access to the cannabis they voted for while at the same time protecting children and avoiding accidental intoxication.

A big determinant of whether public health will benefit from legal cannabis is if the government can raise enough tax revenue to pay for additional social programs and adequate policing of the drug.

There is a big risk that if the government regulates the industry too hard, Canadian companies will fail to become legitimate competitors in the global cannabis market.

The government will be left with all the costs of policing and regulating cannabis, but less tax revenue to work with due to the smaller global size and revenue base of Canadian growers.

Under this scenario, recreational cannabis will be a drain on society instead of a source of funds for much-needed social programs.

On top of child safety, the government says they are trying to snuff out the black market, but are proposing regulations that blatantly create a legal market far inferior to the black market in multiple ways.

The black market poses more of a threat to children and public health than market-friendly legal regulations ever could.

The sooner Canada realizes there are benefits to a thriving domestic cannabis industry, the better off everyone will be.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.