The demand for marijuana is high. Cannabis companies are ready with a variety of products. So what is preventing the legal cannabis market from reaching its full potential? Estimates by Grand View Research show that the global legal marijuana market could be worth $ 73.6 billion a year until 2027. And growth is very clear from the rise in cannabis sales amid the coronavirus pandemic.
Demand has forced Canada and many U.S. states to consider cannabis an essential item, and sales have increased since then.
For medical patients, cannabis is known to help with various health problems such as anxiety, depression, and chronic pain, all of which became widespread during the pandemic. The cannabis industry also offers consumers a variety of products for recreational use and as substitutes for alcohol and tobacco, which are not considered essential products.
As with any other industry in development, there are factors at play that hinder growth. Let’s take a look at some of these.
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What is stopping legal growth of cannabis?
Factors that are limiting the growth of the cannabis sector in both Canada and the US include delays in regulation, supply problems, a smaller number of legal stores than originally expected, and tax cuts. But perhaps the biggest roadblock is the sale of black markets.
Cannabis is a medication that contains THC (tetrahydrocannabinol), a psychoactive substance that makes a user feel “high” when consuming it. This makes it prone to strict regulation. Canada legalized medical cannabis in 2016; recreational cannabis legalization followed in 2018, with the second phase (“Cannabis 2.0,” with vapes, edibles, and more) in 2019. But that did not stop the black market from growing.
Consumers of marijuana products, like consumers of everything else, would rather pay a lower price when it is easy to do so. The black market makes that possible, and “Cannabis 2.0” derivatives were available on the black market all the time, even though Canada took another year to legalize them.
Omar Khan, the national leadership of the cannabis sector at Hill + Knowlton Strategies, explained the following:
The illegal market has no regulatory oversight costs and is intentionally lowballing prices to maintain market share … combined with its ability to offer greater product variance and the slow rollout of licensed retail stores in Canada, [this] gives them a competitive advantage over the legal market.
Cannabis companies pay the price
Supply problems stemming from the less-than-expected number of legal stores in Canada was one of the main reasons for the downfall of Canadian pot companies last year. Delays in regulation in some provinces were a major obstacle to the growth of the recreational cannabis market following national legalization. The marijuana companies had then overproduced them because demand was never the issue. All of these factors contributed to the rise of illegal market sales and lower sales.
Once hot pot supplies INurora Cannabis (NYSE: ACB), Canopy Growth (NYSE: CGC), en HEXO (NYSE: HEXO) saw a drastic hit to their revenue numbers, which declined every quarter as losses continued to persist. Aurora Cannabis and HEXO even came close to clearing the NYSE. Canopy Growth went a little better through its partnership with Constellation Brands, who keep it in a safe place to survive the crisis. All three are trying hard to recover this year.
In its most recent quarters, Aurora saw a 16% year-over-year increase in revenue to CA $ 75.5 one million, while HEXO saw 70% increase to CA $22.1 million. Canopy reported a 22% increase, to CA $ 110 million.
Shares of Aurora, Canopy, and Hexo have declined 60.7%, 17.8% and 49% so far this year, while the SPDR S&P 500 ETF is up 4.6%.
ACB data by YCharts
Meanwhile, higher taxes in the US and the lack of federal legalization are improving the black market for cannabis. California, which has the largest legal pot market, is also the largest for black market sales. Estimates by ArcView Market Research and BDS Analytics show that by 2024 legal spending in California could reach $ 7.2 billion, with illegal spending amounting to $ 6.4 billion.
In addition to affecting revenue for pot companies, illegal products were also a cause of the vaping crisis in the US. Many vape products that have been shown to cause “e-cigarette or vaping product use associated with lung injury”, such as EVALI, have been the result of black market operators using vitamin E acetate in their products..
What can bring consumers to legal markets?
It is the responsibility of marijuana users to understand the importance of ensuring that the products they use are legal and safe. It is also essential that cannabis companies advertise and display their products in a way that provides consumers with clear information on safety, quality and correct use. And it is the responsibility of the government to reduce restrictions on the legality of marijuana (and to introduce quality regulations) so that safe pot products can reach customers easily and efficiently. State-level and federal legalization in the U.S. could further advance the sector.
As these things start to happen, sales of black markets should decrease and legal sales should start to increase. That will be when we see cannabis companies reaching their full potential.
