Today, Cannabis 2.0 legalization will open up a market opportunity in Canada worth 2.7 billion Canadian dollars. Canada will legalize new cannabis-infused products like edibles, beverages, concentrates, and vapes.
In May, Marijuana Business Daily reported one leading cannabis expert’s opinion about business opportunities for these products. The meaningful sale of cannabis-infused products in Canada will start in 2020.
In the “Nurturing New Growth” report, Deloitte predicted that the number of licensed Canadian producers will eventually be almost half of the current level. The agency expects industry consolidation to absorb excess capacity. The market opportunity will be in fewer prominent cannabis players’ hands. The consolidation might reduce pricing pressures for the remaining cannabis companies.
However, cannabis companies need scale to leverage the opportunity. Prominent cannabis players like Aurora Cannabis (ACB), Canopy Growth (CGC), Cronos Group (CRON), and Aphria (APHA) want to increase their market share in existing categories. The companies are also focusing on production and commercialization capabilities for Cannabis 2.0 products.
Aurora Cannabis’s Cannabis 2.0 strategy
On Wednesday, Aurora Cannabis gave a preview of its Cannabis 2.0 strategy. The company provided plans for the roll-out of edibles, concentrates, and vapes in December. Aurora Cannabis expects its production capacity, scale, consumer reach, and retail network to drive new products’ growth in the Canadian market.
A steady supply of low-cost and high-quality cannabis could impact cannabis companies’ success with new cannabis-infused products. Cannabis 2.0 players will also need strong packaging and distribution capabilities. According to the press release, Aurora Cannabis has set up production hubs in eastern and western Canada. The three prominent production sites created to support the launch of the new products involve Aurora Sky, Aurora River, and Aurora Vie. Together, the facilities cover 450,000 square feet. The company strategically selected the production site locations to enable efficient product distribution.
In the “Nurturing New Growth” report, Deloitte estimated the market opportunity for cannabis-infused edibles to be 1.6 billion Canadian dollars. The agency drew several conclusions based on a survey of 2,000 Canadian adults conducted in early 2019. Consumers’ preferred cannabis-infused edible formats include cookies, brownies, chocolates, and gummies.
Aurora Cannabis aims to leverage the opportunity by initially introducing edibles like gummies, baked goods, chocolates, and mints. According to the press release, the company entered into partnerships with two companies in the edible category. The company entered into a two-year licensing agreement with JACEK Chocolate Couture. Accordingly, the company will use the latter’s intellectual property to manufacture cannabis-infused chocolates. Aurora Cannabis has also partnered with WG Pro-Manufacturing & Touché Bakery to manufacture cannabis-infused baked goods.
Aurora Cannabis has announced the construction of a 20,000 square feet manufacturing facility near Aurora Sky, called “Aurora Air.” Notably, the facility will deploy several production lines for manufacturing multiple edible product categories.
On October 3, the company also announced the near completion of Aurora Polaris—a hub for producing cannabis-derived products like vapes and edibles. The company expects building occupancy by October 31.
In the “Nurturing New Growth” report, Deloitte estimated the market opportunity for cannabis-infused concentrates to be 140 million Canadian dollars. According to Marijuana Business Daily, consumers have been demanding high-potency and low cost concentrates. The report claimed that large and efficient cannabis cultivators will only manage to sustain in this market in the coming years.
Aurora Cannabis’s scale and retail relationships make it one of the few cannabis companies suited for the cannabis-infused concentrate segment. According to the press release on Wednesday, the company produces concentrates from 100% cannabis-derived rosin through a proprietary extraction process. The company aims to use the concentrate to manufacture products like live rosin, shatter, and sugar wax.
Aurora Cannabis’s vapes strategy
According to the press release on Wednesday, Aurora Cannabis plans to launch Cannabis 2.0 vape products at various price points to suit different consumer segments. The products include disposable single-use units, closed-loop products, and 510 thread cartridges. Currently, the company has a well tested CBD vape cartridge, Aurora Cloud, in the Canadian market.
Although vaping concerns continue to haunt the cannabis industry, Aurora Cannabis thinks that the black market is the main culprit. In the fourth-quarter earnings call, the company accused Vitamin E acetate, a cutting agent used in illicit vape products, for improved flavor and bigger plume. Notably, Aurora Cannabis claimed that it steered clear of harmful ingredients in its vape products.
Piper Jaffray senior analyst, Michael Lavery, highlighted the possibility that increased vaping scrutiny will finally benefit regulated players.
How are peers preparing for Cannabis 2.0?
In addition, Canopy Growth, Aphria, Cronos Group, and other cannabis companies have been gearing up for Cannabis 2.0. Canopy Growth wants to expand its intellectual property estate and increase its retail presence. In the company’s first-quarter earnings call, it highlighted the importance of vapes and cannabis-infused beverages in its Cannabis 2.0 strategy.
Cronos Group has opted for an asset-light cultivation strategy implemented through multiple partnerships. The company has deployed a similar approach as it approaches the Cannabis 2.0 opportunity. In Cronos Group’s second-quarter earnings call, it highlighted the importance of cannabis-infused edibles and next-generation vape products after Cannabis 2.0 legalization.
Some hurdles for Cannabis 2.0
Although there’s excitement about Cannabis 2.0, cannabis companies might face difficulties in realizing the opportunity. For example, Reuters reported that a slower-than-anticipated retail rollout in Canada could be a major challenge for cannabis companies. Slower retail rollout might lead to fewer sales outlets for Cannabis 2.0 products.
Recently, we saw the issue in Hexo’s pre-earnings announcement. Investors punished Hexo stock as well as other cannabis companies. In Aurora Cannabis’s fourth-quarter earnings call, it highlighted the timing of currently approved and future retail stores in Canada as a constraint waiting for a resolution.
The Reuters report highlighted problems like high regulatory and tax overheads. The issues might increase cannabis companies’ overall expenses and impact their profitability.