Overseas Cannabis Markets Will Explode One Day, But Tight Controls Limit Short-Term Potential
The path toward cannabis legalization being walked by countries outside North America is very different than that taken by Canada and the USA. Hence there is a relatively limited business opportunity overseas in the near term, though ultimately a much bigger opportunity than North America alone.
Cannabis is widely popular on all six populated continents. In fact, though it cannot be known with certainty, we estimate that, of some $200 billion spent worldwide annually on cannabis, only 33% is spent in the US and Canada. But 87% of $20 billion in legal sales in 2020 will occur in the US and Canada, according to August estimates from BDSA. There are few if any other product categories where North America represents a majority of worldwide spending. For example, just 25% of $43 billion in movie box-office spending occurs in the US and Canada.
The vast gulf between the international market’s 13% of legal sales and its 67% of total sales points to the long-term potential for growth of cannabis sales overseas. Clearly, the lag in legal sales has nothing to do with the relative popularity of the product and everything to do with the glacial pace of legalization around the world compared to the US and Canada.
The overseas market is medical-only in major countries, and the US experience shows medical-only to be a limited business opportunity compared to adult use. Colorado, for example, saw a healthy $300-million medical market slowly develop by 2013; but spending may reach $2 billion this year with adult-use sales allowed since 2014.
The medical-only approach impacts opportunity at every level of the supply chain:
Retail: Most countries are requiring pharmacists to dispense cannabis formulations, eliminating the opportunity to build chains of branded cannabis stores as many companies are doing in North America.
Consumer Products: Some countries are banning or limiting flower sales in favor of more medicinal products like tinctures, capsules and pills. Concentrates for legal vaping are rare. Ingestibles are the lion’s share of product in most countries, but there’s nary an infused gummy or chocolate to be found outside North America.
Manufacturing: Magistral preparations (custom-formulated to doctors’ specs in local pharmacies) have survived in Europe and elsewhere, while being largely eliminated in the US as mass merchants wiped out locally owned pharmacies. That limits the cannabis opportunity for extraction companies to bulk or white-label sales, with their lower margins than branded products, at least for now.
Cultivation: All of that makes growing cannabis largely an exercise in maximizing THC content as a percentage of biomass weight, and doing so to GMP (Good Manufacturing Practice) standards more stringent than the typical state-level US regulatory regime requires.
All those limitations help explain why Canadian licensed producers (LP) have been disappointed in their hopes that foreign markets would soak up the excess tonnage they are able to produce. The German government, for example, reports that 6.7 metric tons of biomass was imported into the country in 2019. Our modeling based on the milligrams of cannabinoids needed to provide the products sold there last year suggests less than 3 tons was actually consumed.
That in turn explains why shipments to Germany may actually drop this year even though consumer spending is bound to grow substantially: there’s a lot of cannabis inventory built up, and since little will be sold as flower, freshness is not critical. Importers’ challenges will be compounded when the first domestic German harvest comes in this fourth quarter, a licensed domestic supply for which the government is setting a price below $2,000/ton.
That kind of micromanagement by governments will only slowly yield to more free-market approaches and, ultimately, to adult-use legalization. Hence, companies should move cautiously over the next five years, during which it appears only Mexico, among large-population countries, is likely to legalize adult-use.
But the vast majority of cannabis consumers live outside North America. Companies with the foresight to launch in the North American markets should move cautiously overseas but be prepared when the fuse is lit on what will, eventually, be a rocket.