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Why The Canadian Marijuana Market Will Be Smaller Than Investors Think


Investors have been eager to enter the Canadian marijuana space as the country moves towards launching its recreational cannabis market next July. Despite uncertainty of the legalization bill’s fate in the Senate, the Canadian marijuana market is booming. M&A activity is heating up and stocks are rising, prompting speculation of a bubble.


But a new report contends that previous estimates of the market are overly optimistic. Next year, Canadians will consume about 474 metric tons of marijuana flower, according to GT Research. The cannabis analytics firm predicts that number to reach about 861 metric tons by 2022.


Meanwhile, existing estimates predict demand for cannabis to reach 600 to 900 metric tons in 2018.


 What’s with the discrepancy?

“One thing you often hear about the cannabis market is that people will adopt cannabis en masse, around 17% if you believe the surveys,” said Damitha Pathmalal, Director of Research for GT Research. “Then they go on to assume just because someone tries it, they’ll become a lifelong user… That’s not really the case.”


Just like any other marijuana market, it’s the heavy users that drive the bulk of demand in Canada. Sure, federal legalization will bring new consumers to the market — people who are willing to try the product after the government legalizes it. But how many of those individuals will go on to consume marijuana every day? Not very many.


“The probability of cannabis habit formation for individuals who first try cannabis after [age] 25 is 1.4%,” reads the report. “Half of adopters go on to use cannabis less than 12 times over their entire lives.”


Meanwhile, alcohol’s habituation rate is well above that of marijuana — nearly 20%.


“Everything [in the report] is backed up by significant scientific studies, there’s no conjecture,” said Pathmalal.


The other factor contributing to GT Research’s more conservative view of the marijuana market is a closer look at heavy consumers.


“We did a very deep analysis into the consumer cohort and found that the most frequent users are the most price-sensitive consumers,” said Pathmalal. “There isn’t going to be an influx of new users… which is a prerequisite for high-growth markets.”


“A whopping 37% of heavy consumers wouldn’t participate in the [recreational cannabis market] at a $1 legal premium,” reads the report. “Does the extreme price sensitivity make sense? Yes.”


If a heavy consumer has an average annual salary of $32,894, he or she would be spending 14.8% of it on cannabis. A $1 increase would have a significant impact on these consumers, driving them to stay in the illicit market.

Canadian Prime Minister Justin Trudeau’s main argument for legalization rests on combating the black market and its lack of regulation.


“Young people have easier access to cannabis now, in Canada, than they do in just about any other countries in the world,” said Trudeau at an economic conference. “Billions upon billions of dollars flowing into the pockets of organized crime… because of the illicit marijuana trade, and if we can get that out of the criminal elements and into a more regulated fashion we will reduce the amount of criminal activity that’s profiting from those.”


Uruguay has seen success with its legal cannabis market — the first in the world. The country’s legal cannabis regime is a tightly controlled government monopoly aimed at curbing the illicit market. One young consumer told the Guardian that 25 grams of street weed would cost about $100 “with probably a large amount of pesticide, seeds and stems.” But the government’s higher quality cannabis costs only $30 for the same amount.

The Canadian government is leaving the regulatory details up to individual provinces, which have so far proposed everything from government monopolies with no public consumption to private stores with the possibility of public consumption. Still, it seems unlikely that any province will be selling recreational marijuana at one-third the price of the black market.


But that doesn’t mean it’s a bad idea to invest, even though the seemingly sky-high valuations for Canadian licensed producers don’t make sense to value investors. “They’re not typical value buys. What they are are good investments,” said Pathmalal. “In Canada, these large national players can attract capital and that’s a key source of competitive advantage.


“The fact that this industry requires a very specific skill set to navigate is precisely [what] makes it attractive,” he said. “It takes a lot of work and a lot of due diligence… We don’t recommend retail investors betting their house on the cannabis market without going through a consultancy or a hedge fund because there are a lot of minefields.”


Why The Canadian Marijuana Market Will Be Smaller Than Investors Think

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