Canada Releases Restrictive Labeling Guidelines for Retail Marijuana

We have always argued at Grizzle that marijuana flower is a commodity. Bullish investors countered by saying unique labeling would be enough to allow producers to charge premium prices and avoid a fall in retail prices as legal supply exceeded demand. Now comes restrictive marijuana labeling regulations from the government, making the commodity argument harder and harder to ignore.

Part of what makes a product a commodity is that it isn’t differentiated — one marijuana plant is the same as any other. The government has given legal producers very little room to differentiate competing brands, pushing legal marijuana further into commodity territory.

If consumers can’t even see the flower they’re buying and have limited marketing information to tell them about the product, a rational buyer will focus on price and CBD/THC content, sparking a race to the bottom for prices. The days of “Leafs by Snoop” and colourful edible packaging are long gone.

Leafs by Snoop, Health Canada

The Rules

  • Logo has to go on the upper right of package and can’t be larger than THC warning label
  • Logo can’t use fluorescent or metallic colors and packaging can’t be glossy.
  • Labels can’t be raised, glossy, textured or use foil or cutouts.
  • One brand element besides the brand name can be used. It can be either a slogan with fonts equal or smaller than the yellow warning label or a graphic that must be smaller than the red THC warning label.

Medical Marijuana Included

From the date of legalization medical marijuana packaging will have 6 months to transition in line with the government-approved packaging rules. Recreational marijuana has no transition period and will be required to follow the packaging rules on day 1 of legalization.

Advertising Will be Likely be Restricted

Producers are going to have to be creative to put their brands in front of consumers while also staying on the right side of the law.
Government officials have said their #1 goal is to squeeze out the black market, not to increase drug use by making it look fun. They’re coming at the industry from a public health angle, not a commercial angle. Judging by the strict labeling rules, TV advertising is likely a no go, and even magazine ads could be on the chopping block.

What Does This Mean for Marijuana Stocks?

Labeling restrictions make it harder for producers to convince the average Canadian to pay a premium for their supply. If I can get perfectly safe, effective, high THC flower for $7/gram why should I pay $8 or even $9 per gram? Being unique just got even harder.

The silver lining to this ruling is that producers could cut their significant marketing and promotion budgets if they choose which would have a dramatic impact on profitability in the short term.

Producers currently spend almost half their revenue on marketing and promotions. Longer term producers may have trouble growing sales by word of mouth alone and will likely shift marketing budgets from retail to other channels, so don’t count on mass layoffs in the marketing department just yet.

Percent of Revenue Spent on Marketing and Promotions