Chewing on the cannabis edibles market risk.
For those that waited in line on October 17th and were disappointed to realize that edibles are not in fact legal yet, there are some key reasons for that, as well as complexities that we can model the outcomes of based on the industry in California and Colorado. While the consumer can bake a tray of cannabis cookies at home legally, the mass consumer market needs to be protected through clear frameworks that apply separately to the food industry and the cannabis industry. Analogous to a Venn diagram, overlap of regulations between cannabis and food industries provides compliments, but also risk to investors given legislative uncertainty.
There is good reason for industry to wait in anticipation and make strategic moves in the edibles space prior to expected legalization in 2019. The market for edibles has been proven successfully in the United States. As reported through Munchies, consumers purchased cannabis-infused food and drink to the tune of US$180 million in 2017 in California, which accounts for approximately 10% of the total cannabis sales in the state. However, while edibles come in all shapes, flavours, and sizes, these differences and the multitude of variances between products offers insight into why regulation may be a challenging road ahead, and why not all edibles will come out the other end as a marketable consumer product.
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Although the market exists, if experiences in states such as Colorado and California can teach us anything, it is that there is a strong likelihood of consolidation coming the way of the edibles market. Such a reduction in the number of businesses involved in the edible space is a result of the stringent measures that were put into place by the agencies regulating cannabis and public health. In Canada we should expect to see similar measures, such as the requirements of a commercial kitchen, stringent ingredient control, packaging, and ensuring that any packaging is child-resistant.
Canada’s health product industry is regulated in part through a Natural Product Number (NPN), which identifies the product as safe use as per Health Canada. The direction that the government is taking is unclear, but if cannabis-infused products have to move through such a process to make it to market, it would signify that the product is high-quality, deemed safe, and effective. While this protects the consumer, it leaves producers with additional hurdles that take time, additional cost, and would likely require ongoing compliance needs that the food industry does not have.
Colorado has shown us that given the potential liability for edibles getting into the hands of those that should not consume them (such as children), products have been banned outright. For example, as of October 1, 2017, Colorado banned gummy bears infused with cannabis. Ensuring that cannabis food and beverage products are clearly differentiated from their mass-produced counterparts will be a key necessity of not only the packaging but the appearance of the product.
Serving size is another aspect that will be regulated, again restricting the way in which one edible business could differentiate from another. Bulk edibles, such as those that Auntie Delores produced in Colorado, are examples of goods where the per-serving dosage could not be regulated and ultimately led to the removal of product lines.
The risk to investors in the edible market is clear: without a guiding framework in place by the Federal government, there will be ambiguity in terms of what edibles will and will not be allowed to come to market. It is also worth mentioning and noting that while we see US companies bringing products to the Canadian market, regulations in the US may differ from what Canada imposes, and these differences may in turn lead to higher costs associated with production in Canada, or outright bans on certain items or ingredients. In relating issues such as child-proof packaging we can look to Tide Pods as an example of the benefit of having foresight, as is the case with edibles. Where Tide Pods pioneered a new way of doing laundry and had to learn from their own mistakes, edibles have gone through the regulatory wringer in the US and provide us with foresight into contentious issues and hurdles in regulatory approvals.
Mr. Kwan is currently the CEO & Senior Portfolio Manager of CannaIncome Fund, a private investment firm focused on the cannabis sector. In addition, he ... <Read more about Arthur Kwan>