Government Restrictions are Handicapping Canadian Brands
The number one public policy goal of the Canadian government post-legalization has been to keep cannabis out of the hands of children.
The government is severely restricting branding to make sure there is no chance cannabis products will appeal to children.
The practical implications of these policies are to severely limit the ability of Canadian cannabis brands to compete on an international stage.
On top of branding restrictions, many publicly traded LPs (licensed producers) are restricted from owning US businesses, effectively shutting off a route to acquire popular American brands or gather market knowledge through joint venture partnerships.
Canada is trying to build an entirely new consumer category with one hand tied behind its back.
Why Branding Matters
When consumers have trouble telling one brand from another, they shop based on price, effectively commoditizing cannabis.
Imagine if all sports drinks looked the same. Do you think consumers would be willing to pay a large premium for Gatorade over Powerade? The answer is probably not.
The US Branding Difference is Striking
The following pictures are of retail cannabis packaging from the Ontario Cannabis Store website compared to medical products available in the US.
Branding rules in Canada restrict the brand logo to a small section of the package, with the remainder covered by health warnings and simple product descriptions.
Compare Canadian packaging to what is legal in the US and the difference is striking.
Even in medical only states, customers can buy bright green cherry limeade drinks and watermelon gummy candies with huge company logos and attractive product pictures.
In the US the company logo is the largest size font on every product, while in Canada the largest sizing is reserved for the THC warning.
The current regulations make it very hard for consumers to tell one brand apart from the other keeping Canadian brands from building brand awareness and loyalty.
Canada Still has a Capital Advantage
The legalization of cannabis opened the capital market floodgates in Canada this year.
Licensed producers have been able to raise tens of billions of dollars in 2018 and have more than enough cash for new product development, brand creation and other R&D.
US companies have been rushing to list their company stock in Canada to access some of this money, but they are raising far less cash than their Canadian counterparts.
Cash is important because it allows Canadian companies to outspend their cash-strapped US peers on new product development and brand creation and afford experienced brand executives from outside the industry.
The problem with advertising restrictions in Canada is that they have killed the incentive to go big on brands.
Why would a company waste millions creating dozens of brands and new product categories now if they are prohibited from testing these products to see which will work with consumers?
They would rather take a measured approach and wait for regulations to change, effectively falling farther behind US peers who are free to test any product and brand strategy they want right now.
Cash gives Canadian companies lots of options, but at the end of the day, they will need to turn that cash into recognizable brands and products that consumers want to buy.
But the US Has the Brands
The US has a long history of brand creation. According to the Brandz global brand ranking, 55 of the top 100 global brands are from the US, while only two are from Canada, and neither are consumer goods companies.
The US has an advantage with lax regulations making the country a petri-dish for cannabis branding.
Canada does not have the same luxuries, with an effective ban on advertising, restrictions on the sale of certain products and highly restrictive labeling rules.
In contrast, recreational cannabis markets have been around in the US for over four years, and the lack of marketing, advertising, and product restrictions provide a perfect testing ground for companies.
Cannabis brands are free to test any kind of packaging or product format to see what resonates with consumers.
Advertising is also much less restrictive with both merchandise and billboards permitted under US marijuana laws, but largely outlawed in Canada.
Differentiated product labeling lets US companies build brand recognition and market share now.
They can then leverage this brand awareness as they expand into other states and when medical markets evolve into recreational.
The first companies to figure out what products and branding consumers want may be the ones who are able to build market share as global cannabis legalization marches forward.
The US has multiple advantages at this stage in the legal cannabis market’s development.
The Two Ways Canada Can Still Win
Canada still has a chance to compete on an equal footing with US companies, but they will have to move decisively when regulations allow it.
Buying leading US cannabis brands is the most straightforward and least risky way for Canadian producers to keep their market share lead.
While multi-state operators like Acreage Holdings and Curaleaf are too large to be acquisition targets for anyone but the three largest Canadian producers, smaller specialty manufacturers like Plus Products (CSE: PLUS) trade for a few hundred million dollars and represent an easy way to bring popular consumer brands in-house.
We expect the large licensed producers are already scouting the US landscape, identifying popular brands they want to acquire.
Multi-state US operators are doing the same, however, so the competition for popular brands will be fierce when the US legalizes cannabis, potentially in 2020 or 2021.
The second option is to build a popular brand from scratch.
This is the high risk but high reward path to success.
Canadian LPs are hiring smart with the five largest companies bringing on chief marketing officers with significant experience in medical markets and at global brands like Diageo, Pepsico, and Chobani.
US producers are playing to win however with Cresco Labs, a soon to be public US grower and retailer, just hired the former Nike creative director Scott Wilson.
Wilson was named one of the top 100 designers in America by Time Magazine and was awarded the 2012 Smithsonian Cooper-Hewitt national design award which is effectively an award for the best designer in America that year.
The US has a long history of creating globally successful brands, making it all the more important that Canadian producers bring on the best design talent in North America to be ready to compete when North America becomes one cohesive cannabis market.
The Winner is Not Yet Determined
The US has the obvious regulatory advantage at this stage, but Canada still has the capital.
Investors should be watching US and Canadian operators closely to see how brands and products develop in their respective markets.
Explore dispensary websites in both countries periodically to see who has the better product selection and packaging.
Canadian regulators are putting children’s health and safety first which is the right call, but if they don’t relax regulations to foster a healthy culture of brand innovation and product testing, US cannabis brands could easily end up winning the competition for the global cannabis consumer.