The cannabis industry is in the midst of dynamic and challenging times. The industry faces lagging sales in established markets like Canada, dry capital markets for most industries and notably cannabis, uncertain legislative processes in several major cannabis markets including the U.S., Germany, and Colombia. While it's difficult to identify the opportunities, there are no shortage of threats within this landscape.
BDO recently hosted our 2022 Global Expansion Cannabis Conference, gaining insight from the top management of several global cannabis operators. Their insights helped shed light on the path toward sustained profitability across this highly complex global landscape.
Here are some of today's key global trends and predictions in cannabis:
Inconsistent regulatory landscape
One could argue that regulation is the most critical issue facing cannabis operators, both domestically and around the world. For the most part, every country has a different approach to regulating cannabis, with many in a state of flux, making business planning an exceptionally difficult process. This results in further challenges in attracting investors given there's often little certainty that a good business plan today will continue to be viable tomorrow. Cannabis legislation is typically focused on domestic, social needs with little consideration of corporate issues necessary to serve the consumer effectively, making the multinational business model particularly challenging. This is unlikely to change in the immediate term and we can expect to see continued obstacles around import/export scenarios in many countries.
Lessons learned from early adopters of legal cannabis
As one of the earliest jurisdictions to legalize cannabis, Canada made many errors and has yet to correct toward a sustainable path, including:
- Over regulation (particularly of CBD products)
- Excessive taxation
- Too many licenses issued for both producers and retailers
- Lack of enforcement against the ongoing “grey” market
- Allowing export but not import
- Government retailers competing against the private sector
These issues have been destructive within the domestic market, but is there evidence that other countries have learned from Canada's mistakes? Evidence suggests that many governments are leaving market dynamics to the private sector. Strategies that may breed success may include focusing on education of both the medical community and the consumer and efforts toward building demand rather than waiting for it to grow naturally. Limiting supply capacity and expanding only where demand is evident could also help, but all of these strategies are difficult prospects in a competitive landscape.
Focus on climate change
Few management teams would argue that climate change is not an issue that needs to be incorporated into business planning. And the cannabis industry is in somewhat of a unique position to build in a sustainable manner given the growth in the industry along with the agricultural product at the heart of it all. Why grow under lights when we can grow using natural, consistent sunlight? This aspect, coupled with the attraction of cultivating in low-cost jurisdictions would seem like a natural evolution for the global cannabis industry, as it is for many agricultural businesses. However, this shift is hindered through import limitations, such as Canada, and legislators have a role to play in allowing the industry to evolve in a sustainable manner.
Key considerations on climate change are the upcoming ESG regulations being imposed in most major capital markets. This will require listed companies to report on their ESG efforts and consider anticipated effects of climate change and related issues in their future operations and reporting. Management teams and their auditors are beginning preparations for these reporting requirements, which will provide investors with insights into risks and plans around ESG.
Pharmaceutical applications for cannabinoids
Many have anticipated that the pharmaceutical industry would move into the cannabis industry once the regulatory landscape had evolved to the point that they could do so without risking their business. This time has not yet come; however, many cannabis companies are making progress in developing such products and related research.
This development will provide an opportunity to educate consumers and the medical community. There's also potential to reach a new demographic of consumer—the non-traditional cannabis consumer that is overlooked due to the focus on the recreational market. Watch for companies integrating pharmaceutical development into their business strategies as this aspect of the market develops.
Regulatory case in point: Colombia
Colombia has been the first country to embrace the concept of high volume, low-cost medical cannabis production for export globally, capitalizing on its abundant sunlight, water, and inexpensive labour to attract investment in large-scale cultivation facilities. It is worth remembering that the initial purpose in Colombia was that the country would be recognized for the sale of transformed products (processed cannabis extracts), but not for the sale of dried flower. This changed during the end of the previous government when the export of dried flowers was approved, partly due to the pressure exerted by the industry associations. The change will surely be oxygen for Colombian-based companies.
The recent change in administration not only brought in the first progressive government in many decades, but also put the future of cannabis in Colombia in the spotlight. This is demonstrated in the recent bill going through the Congress of the Republic. So far with the support of the majority and with the approval of the government, the adult use of cannabis is expected to be authorized, legalizing the entire production chain. The regulation will continue to evolve, and hopefully it will also allow commercialization with a little more flexibility in licensing.
BDO can help
While the cannabis industry is dealing with adversity, there is still room for opportunity and growth. Our experienced professionals understand the market volatility and we can help you create a plan for success.
Click here to watch the full on-demand recording from our 2022 Global Expansion Cannabis Conference.
Contact us
Bryndon Kydd
Partner, National Cannabis Group Leader
BDO Canada
Juan Camilo Campos Villamil
Partner
BDO Colombia