As challenges mount for Canada’s cannabis companies, one of its largest producers is making a move into the US market.
In October, one of Canada’s largest cannabis companies started its migration into the US market when Canopy Growth Corp. created a new US-domiciled holding company, Canopy USA, LLC. And with that, the organization effectively accelerated its path into the American cannabis industry after already establishing its Canadian presence across the country’s adult-use markets.
The company’s motivations are clear and were laid out in its announcement: “As the growth of the U.S. cannabis market continues rapidly at the state level, this strategy enables us to take control of our own destiny and capitalize on the once-in-a-generation opportunity in the largest cannabis market in the world,” CEO David Klein said in a press release. “We expect to unleash the full power of Canopy’s scalable and ideally-positioned U.S. cannabis ecosystem to unlock potential expansion opportunities.”
From our perspective, this looks to be the front end of a wave that might find more Canadian cannabis companies migrating away from their home country to seek new growth opportunities.
Now, this isn’t the first time a Canadian cannabis company has taken a disruptive stance and decided to set a new precedent in this nascent industry, and it probably won’t be the last. And while there are many regulatory approval hoops to jump through on both sides of the border, it’s clear that Canopy has turned regulations upside-down by coming up with a plan for effectively accessing the US market.
Opportunities and Challenges Abound
When the government of Canada legalized, regulated and restricted access to cannabis in 2018, the move was monumental for the cannabis industry. At that point, Canada became an innovator by setting a precedent that legalized adult-use marijuana. Organizations were given the opportunity to influence foreign policy development, thanks to their country’s leadership position on cannabis.
Several companies capitalized on the opportunity, and a handful of major companies forged ahead with helping to define the industry as it evolved. According to MJBizDaily, in fact, “The most profitable Canadian cannabis businesses are government-owned. By contrast, private-sector profits have been few and far between.”
Another subset of companies has carved out a piece of Canada’s cannabis market and is attempting to expand its footprint and become industry innovators. They witnessed the expansion in other markets and jurisdictions and saw that growth as a path to accessing profits and advancement in the industry.
In the last four years since legalization, Canadian cannabis companies have encountered myriad roadblocks, including significant marketing regulations, production limits, higher taxation and overproduction. Most recently, they’ve been dealing with labour disputes that are leading to lost revenues and product waste. Impacted by the global pandemic and now the initial signs of a national recession, the Canadian markets continue to experience persistent declines. As a result, some of the larger Cannabis companies are exploring markets like the UK (for medical cannabis) and the US.
Weighing Out the Pros and Cons
While cannabis is still illegal at the federal level in the US, 21 states have already legalized cannabis for recreational use. The limitation of federal illegality continues to challenge plant-touching producers and restrict access to capital markets through public listings in the US markets. Canopy’s latest move, however, tells us that Canadian companies are indeed eyeballing opportunities south of the border and taking steps to cross over.
This could be costly for the Canadian market, where cannabis companies have spent the last four years working as true innovators, developing new edibles, beverages and other products. If market makers like Canopy continue to migrate to the US markets, it could further cripple the Canadian market.
Canopy USA’s “asset light” strategy—whereby the company will use both owned and outsourced production capacity and leverage a network of third-party producers to scale—may present challenges like higher costs and delayed time to market. After incurring billions of dollars of losses in Canada due to overbuilding, however, the company appears confident that this strategy will lower its risk in the US market.
This asset light strategy does provide a potential solution for companies looking to maximize their assets and provide shareholders with returns ahead of the SAFE Act. This US bill, which “generally prohibits a federal banking regulator from penalizing a depository institution for providing banking services to a legitimate cannabis-related business,” is currently being reviewed by the US Committee on Banking, Housing and Urban Affairs.
The Door is Now Open
Cannabis companies wanting to expand into international markets can also look beyond the US for new growth opportunities. With Mexico also legalizing marijuana, for example, and Colombia taking steps in that direction, moving into those countries could help companies leverage lower growth, harvesting and production costs.
One day after Canopy introduced Canopy USA to the world, Germany received the green light from the European Commission. This took the country one step closer to legalizing cannabis for recreational use by 2024. Going forward, we may see other European nations making advances and providing access to markets, products and regulations to Canadian companies that want to increase their footprint in those markets.
Whether we see a continued flight to new markets by Canadian cannabis organizations that are seeking new horizons remains to be seen, but based on the momentum so far—and the precedent-setting Canopy announcement—the path forward is becoming clearer and the door is definitely open wider for organizations that want to make the move.