The strategy roadmap
How cannabis companies succeed in the recreational use market will depend on the strategy they pursue. There are primarily two broad strategies to explore: cost and product differentiation. Because there are so many players in the market (HMMJ), companies will pursue either or both of these strategies to capture the adult use market share.
The cost strategy entails a lower cost of production per unit through economies of scale that would eventually lead to higher margins. That works great for commodities, and eventually, cannabis will become a commodity. For example, gold as a commodity has fixed standards. A customer purchasing one gram of 24-karat gold is going to receive the same product no matter where it is purchased.
However, it is not the same when it comes to cannabis. There are several strains of cannabis, and each one differs on the content of CBD (Cannabidiol) and THC (Tetrahydrocannabinol). The various combinations of CBD and THC can elicit different moods or cure a variety of symptoms. So while driving cost will certainly be important, it will be more difficult to achieve than traditional commodity products.
This is where product differentiation will largely be the strategic choice for companies such as Canopy Growth (WEED), Aurora Cannabis (ACB) (ACBFF), and Tilray (TLRY). Companies will offer a variety of products with different levels of CBD and THC in varied formats. The three broad product formats currently produced by most cannabis producers include dried cannabis, oil, and soft gels. Of course, if a particular product type becomes a hit, a company can then focus on driving the cost down in order to keep others out of the market.
To make sense of so many stocks, investors must dig deeply into the strategic direction of cannabis stocks before making investment decisions. In the coming weeks, we’ll look at company strategies for cannabis stocks in more detail. Until then, be sure to visit Market Realist’s sector page.
In the previous part of this series, we briefly looked at cannabis companies in the Porter’s generic strategy framework. In a previous article, Why You Should Look at This Strategic Roadmap of Cannabis Players, we concluded that product differentiation will largely be the strategic choice for cannabis companies (HMMJ) such as Canopy Growth (WEED) (CGC), Aurora Cannabis (ACB) (ACBFF), and Tilray (TLRY). Before we look at that, let’s see what the market segments are for cannabis players.
The market segments
In the above chart, you can see the width and depth of the potential market segments that will be targeted by cannabis players. In Canada, there are three broad segments: medical, recreational, and hemp-based products.
Outside Canada, the opportunity mainly lies in the medicinal market for Canadian companies. However, as the international market warms up to recreational cannabis, Canadian companies will get an opportunity to push into those markets with expertise gained in the Canadian market. Until then, the Canadian recreational market will serve as a case in point for other countries on how to regulate the market to create a safe environment.
The medicinal market
Long before recreational cannabis legalization was even on the horizon, Canada legalized medicinal marijuana under the Marijuana for Medical Purposes Regulations. MMPR was later replaced with Access to Cannabis for Medical Purposes Regulations that allowed patients to grow cannabis at home.
While the current medicinal market in Canada is primarily focused on providing cannabis-based drugs to human patients, companies such as Canopy Growth will also focus on drugs for animals. We’ll look at that more in the next part.