5 minute read 20 Jul. 2021
Cannabis plant close-up

When the ground beneath your feet starts shifting, will you stand still or leap forward?

By Joel Alden

EY Canada Partner

Passionate about client success. Driven to enable client organizations to reach further, move faster and with adapt greater agility.

5 minute read 20 Jul. 2021

Organizations that dive deep to understand cannabis’ transformational market opportunities, and focus accordingly, can make agile moves now to position themselves as sector leaders over the long term.

Asking these questions now can help you build on this environment to carve out a prominent role in tomorrow’s cannabis industry:

  • Is our view of the addressable market broad enough?
  • What critical innovations can create new market opportunities for us?
  • How can we proactively build optionality into our strategy? 

If you’re not ahead of trends in the cannabis sector, you may feel you’re already falling behind. But this evolving global industry is still in its first inning. Companies that will lead this space 10 years from now have not yet been decided.

Read the full report here.

What’s shaping the sector right now? Adjacent industries such as tobacco, alcohol, consumer health and pharmaceuticals are paying increasing attention to this space as their markets are becoming disrupted and as new high-growth opportunities emerge. Regulatory reform is sweeping the globe. New potential entrants are considering opportunities. Cannabis is becoming less of a niche market, and increasingly accepted by the mainstream. And the industry itself is proving to be much bigger than many first projected.

Not only is cannabis becoming a part of the cultural zeitgeist, leading cannabis companies show an estimated annual median gross margin of 41% and an estimated median annual revenue growth rate of 63%, respectively. This is significantly higher than traditional, established consumer products, which have historically grown at 2% to 3% each year.

Taken together, these factors are generating viable opportunities worth exploring — many of which simply may not have existed even a few short years ago.

1.       Is our view of the addressable market broad enough?

The stigma around cannabis has started to fall away, and research and stakeholder education has increased. More than 40 countries and counting have legalized cannabis, medical cannabis or specific formats for qualifying medical purposes. There are an estimated 190 to 250 million cannabis consumers worldwide. The total addressable market is attractive to adjacent industries looking to expand into new market segments, geographies, product and consumer segments.

Research is beginning to show a host of potential clinical interventions spanning everything from modulating immunity, inflammation, neuroprotection and pain, to hunger, feeding and metabolism. The 100 or so lesser-known cannabinoids like CBG, CBN, THCV; 150 terpenes (aromatic compounds) and other potentially therapeutic compounds could amplify those future market opportunities further. Some compounds may be non-intoxicating or more efficacious when combined with other compounds, but more fulsome research is required to unlock future growth.

To get ahead:

  • Consider how what you do best connects to where the industry is going next. The nature of your operations, products and existing consumer base may already be well positioned to take advantage of the industry shift.
  • Look for synergies from your existing assets and capabilities to enter the cannabinoid market and consider where alignment of the two can identify high-growth opportunities.
Table showing top 10 cannabis innovation areas

2.       What critical innovations can create new market opportunities for us?

Those already shaking up the cannabis industry are taking a holistic view of the sector and using innovation to accelerate research, product development and consumer understanding. On the one hand, dried cannabis flower has been the dominant cannabis format to date and will continue to be an important category. 

Down the road, individuals may consume cannabis as a supplement with their morning breakfast for a boost of energy, apply cannabis-infused topicals to soothe localized pain from a round of golf, or drink a beverage before bed to promote relaxation. Creating such substitutes and investing in resources to develop these new markets are attractive propositions for adjacent industries already making their way into the space.

To capitalize on new innovation, consider:

  • Taking down organizational silos that impede innovation can accelerate the speed and impact of your progress. Innovation thrives when it’s deeply embedded in organizational culture.
  • Creating a collaborative innovation ecosystem through incubators, accelerators and co-innovation spaces. This can provide high-growth potential companies with access to resources, infrastructure, product development and commercialization expertise.

3.       How can we proactively build optionality into our strategy?

So much of the market opportunity ahead will only accelerate as major regulatory breakthroughs and scientific milestones are met. Valuation premiums for good operators, additional investments and industry participation are likely to increase as additional countries, like the US, embrace federal legalization. Waiting for the industry to cement itself can mean missing out on the opportunities already proliferating across the global industry.

Early entrance into this emerging industry typically requires significant infrastructure investments. However, late entrants may miss out on opportunities that are accessible only through established and trusted partnerships. Optionality can be built into strategy by taking an iterative approach to scanning the market, developing adaptive commercial strategies, conducting scenario analysis and engaging in pilots that are structured in a way that reduces risk while enabling active participation.

Create greater optionality by:

  • Using flexible and innovative investment and partnership structures to mitigate risks and compete effectively over the long term. Given the many unknowns and dynamic changes in the industry’s future, the traditional “build, buy or joint venture” market entry framework may need rethinking.
  • Decreasing risk through structuring contingencies into minority investments with the option to convert to majority / controlling interest upon certain market conditions, economic milestones or regulatory reform.

Summary

Where do we go from here?

With the right alignment, just about any company competing in a mature adjacent industry can uncover a route into the sector, tapping into new growth. Right now, the industry represents a wealth of possibilities to explore. Making smart investments today can secure optionality as legalization expands, regulations evolve and innovation unlocks new product, market and customer opportunities. Exploring what investments, partnerships, joint ventures or transactions could make the most sense for you now means building agility and alignment with your longer-term strategy. With an industry moving this rapidly, that’s critical.

About this article

By Joel Alden

EY Canada Partner

Passionate about client success. Driven to enable client organizations to reach further, move faster and with adapt greater agility.