Conference Speaker: Growing Cannabis Market Drawing Serious Investment

Chris Gaetano
Published Date:
Nov 6, 2019
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Vivien Azer, a cannabis industry analyst with Cowen and Company and the industry overview speaker at the Foundation for Accounting Education's Nov. 6 Cannabis Conference, said that the burgeoning cannabis market presents a major opportunity, as evidenced by major investors entering the sector for their own piece of what could potentially become an $80 billion sector. 

The market represents not only adult recreational use, she said, but also beauty supplies and medicine, both over-the-counter and prescription, all of which have attracted attention from well-known and established brands. She said that the three largest beer companies in the United States (Constellation Brands, Anheuser-Busch InBev, and Molson Coors) have each made strategic investments in the Canadian cannabis market, anticipating a rise in adult recreational use. On the beauty side, major retailers such as Neiman Marcus, Sephora, Lord & Taylor and Barney's have embraced cannabidiol (CBD) products, including Estee Lauder's hemp-infused facemask. She also noted major development in the pharmaceutical industry, with firms such as GW Pharmaceutical and Novartis developing new medications and partnering with other cannabis companies for distribution. In addition, she noted a separate category: pet use, observing that owners are increasingly giving CBD to dogs with joint pain.

Azer said that all this investment shows that cannabis has become serious business backed by serious money, which is what led her to project the market growing from $50 billion today to $80 billion by the year 2030. Even when firms aren't directly investing in the cannabis market, Azer said that they are still taking this sector seriously due to the impact it can have on other sectors of the economy. She said that, in 2016, there was a great deal of resistance from institutional investors to have any form of interaction with the cannabis sector at all. 

"So the angle we took was to explain to investors that you might not be putting money to work in cannabis today, but if you're a shareholder in Inbev or Molson, it's time to start paying attention because this is a fundamental structural risk to the beer segment in the U.S." she said. 

Azer pointed out that there has been double-digit compound growth in terms of absolute numbers of cannabis users in both the past five and ten years. While the primary consumers tend to be young, she said that even among the 55 and up cohort, the number of people who said they've used cannabis in the past year grew from 9 percent a decade ago to 16 percent now. She also noted the rising support for legalization, on top of the 10 states where adult recreational use is already legal and the 34 states where medical use is legal. Surveys have found that 66 percent of the population overall is in favor of legalization, including over 50 percent of Republicans, making this a bipartisan issue. Further, 78 percent of people aged 18-34 are in favor of legalization, "which is why we're so constructive on long-term viability."

Not that there aren't challenges. For one, the black market takes up a lot of the market today. Of the $50 billion in the current sector, 80 percent of it is illicit sales, with only a minority going through legitimate channels. To capture the full value, more sellers must move out of the black market, although she noted that the legal market in Canada has been weighed down by a lack of high-quality supplies and a lack of stores. She noted that there are only 25 legal stores in all of Ontario. Further, she said, the illicit market is very sophisticated, and it is often difficult to tell the difference between legal and illegal stores. 

"There are literally brick and mortar stores, and they look like legal dispensaries but they are not, and they're not just selling flower but vapes, edibles, drinks, and none of these are available in the Canadian marketplace," she said. "So while you as an illicit market consumer may want to purchase in the legal market, if you moved away from combustion to vapes, you won't [want to go back]." 

Azer acknowledged the spate of recent lung illnesses that have been connected to vaporizers, and lamented that despite the Centers for Disease Control (CDC) and the Food and Drug Administration (FDA) saying these illnesses were likely connected with illicit products, media outlets have nonetheless driven what she said was an unfounded fear, which she said has disrupted the sector.

There is also the fact that while 124 million Americans have said they've tried cannabis in the past year, only 34 percent have done so in the past month, and so much of the sector's future growth will be finding a way to bridge this gap. 

Still, Azer said she remains confident in the sector's ability to grow, and was heartened by the diverse number of products it has made available for sale, particularly in manufactured goods. She also cited a study showing that the risk perception of cannabis has gone down dramatically, and is now lower than that of alcohol. In addition, she posited that cannabis could help reduce the opioid epidemic, citing a study by the Minnesota Department of Health that found that opioid use was significantly reduced among patients in Minnesota’s medical cannabis program.

"When you think of the margin profile of all these different goods, ... the more work a manufacturer is doing to the product, the more value they add to the proposition, and the higher the average selling price and margin they can extract," she said. 

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