Investing in the cannabis industry has been a disappointment for many. The companies are facing problems in earning profits quickly. It is becoming clear that the industry is facing challenges from illegal market products. For example, the legal market seems to be selling products at a non-competitive price point. Let’s look at why this is an issue.
Cannabis’s lower cost
The cannabis products in the illegal market are cheaper because of lower costs. For example, illegal producers do not have the regulatory costs that legal players must bear.
The illegal producers also don’t have extensive research and marketing costs that eat away their profits. In addition, illegal market players are also free from compliance and capital raising costs. All these factors lower product prices.
Moving to higher margins
Given the above situation, it makes sense for companies to shift gears to higher-margin products. Cronos Group (CRON), for example, is introducing skin products made from cannabis extracts. In addition, other companies are making drinks and chocolates containing cannabis.
The above formats are largely unavailable in the illegal market. However, the companies that are developing these products believe they can get more profits from these products. We also believe that the illegal market would not have the motivation to develop these products.
Our belief is driven by the high costs required to develop edibles and drinks. Also, selling these products in the general retail space isn’t accessible to these black-market players.
On November 13, Charlotte’s Web Holdings (CWEB) reported its third-quarter earnings. The company reported revenue growth of 42%. In its press release, the company discussed its plans to build the infrastructure for CPG (Consumer Packaging Goods). The company stated that it expects the FDA to pave the way for cannabis consumer products.
As a result, the US market is developing plans to ensure consumer safety. In other words, cannabis that comes under the purview of the FDA may boost to legal cannabis producers.
Cronos Group (CRON), which reported its earnings on November 12, experienced 41% revenue growth year-over-year. In its press release, Cronos Group also discussed developing consumer CBD products derived from hemp.