Pliability of Canadian Cannabis Industry Triggers New Business Development
(4 months ago)
NEW YORK: The Canadian cannabis industry is pliable, changing shape amid mounting public support, favorable legislative action, an influx in capital, and the integration of alcohol and tobacco. For years, this massive industry was entirely illegal; its potential unavailable to legitimate investors.
As Canada heads toward legalizing recreational cannabis later this year, however, the continuous sculpting of the industry provides investors a wealth of consumer-driven investment opportunities. Choom Holdings, Inc. (CSE: CHOO) (OTC: CHOOF) (CHOOF Profile) is targeting the recreational user via its own brand of high-grade handcrafted cannabis. Cannabis lifestyle brand Hiku Brands Co. Ltd. (CSE: HIKU) (OTC: DJACF) (DJACF Profile) recently received a $10 million equity investment from Aphria, Inc. (TSX: APH) (OTC: APHQF), denoting high expectations for recreational cannabis. Canopy Growth Corp.'s (TSX: WEED) (OTC: TWMJF) recent investment from a big alcohol brand reveals a glimpse of how separate sectors of recreational consumables are interwoven. This strategic blending means big business for cultivators such as ABcann Global (TSX-V: ABCN) (OTC: ABCCF) (ABCCF Profile), a recognizable licensed producer and seller of pharmaceutical-grade cannabis products.
Canada Heads for New Highs
An estimated 5 million Canadians already smoke cannabis once a month, with another 900,000 expected to join them after legalization. In 2015, the country was already spending nearly as much money on cannabis as on wine, indicating the huge business potential of this sector. The question is, how will companies tap into that wealth?
One of the big changes expected over the next few years is the integration of recreational cannabis with the alcohol and tobacco industries. With their experience of producing, distributing, and marketing recreational consumables, these businesses have the most relevant experience to shape the marketplace. Their investment and expertise will help cannabis companies find creative ways to cater to consumer demand, not just medical users.
Among the companies preparing to make the most of this opportunity is Choom(CSE: CHOO) (OTCQB: CHOOF). Based in the Okanagan region of British Columbia, the company is well-placed to make the most of the production, sales and marketing opportunities offered by the impending retail market, which has a forecast value of $4.9 billion - nearly $9 billion (http://cnw.fm/xch0D).
With its relaxed, youthful brand, Choom is positioning itself to reach the ideal growth market of cannabis users. Consumers in their 20s tend to be more socially liberal than their elders. They have substantial disposable incomes and are used to spending a large part of them on consumables such as food, drink and tobacco, and are therefore likely to make up a large part of the recreational cannabis market.
To connect with these consumers, Choom has created a hip and modern brand inspired by Hawaii's culture and relaxed atmosphere. The brand's story taps into the history of the 1970s "Choom Gang," a group of buddies in Honolulu (including former President Barack Obama) who knew how to relax with "choom," the local's term for marijuana. Choom's trademark slogans pivot off another unconventional phrase, "Say Hello to...", bringing a heady dose of good times and good friends together as the company invites investors to "Say Hello to Choom" as it lights up the adult recreational cannabis market in Canada.
Reaching Out to Customers
This aesthetic extends to the design for Choom's "Aloha"-style dispensaries. It's a clean, modern, stylish look, crafted by the designers behind some of the world's most recognizable retail environments. Couches, pale wood and carefully chosen banner fonts create a relaxed atmosphere. Clean white shelving and neat presentation make a space reminiscent of Apple stores - another well-recognized brand with a strong hold on the disposable income of millennials.
One of the most important factors in marketing recreational cannabis is going to be establishing such an aesthetic. Brand specialists will want to leave the cold formality of medical use and the seedy criminal associations behind, while retaining hip association with cannabis. Choom's branding is ideally designed to make this shift, while establishing prestige brands for the discerning consumer.
The stores are designed to appeal to the widest possible market. Choom is aware that its core business will rely on existing users looking to obtain their cannabis legally, and their stores will make a comfortable shopping environment for these consumers. But there are also the "curious customers" - those without a medical need for cannabis and who did not want to consume it illegally. They're expected to fuel a 19 percent increase in the number of cannabis users in Canada. By creating a familiar shopping space, Choom will make it easier for them to enter the market.
Experience and Integration
Choom's business proposition extends beyond the retail face of the cannabis industry. It is also looking to place itself within the ancillary markets that will support the consumer business. Testing labs, security, infused products, consumption paraphernalia and crop cultivation will all be part of an expanding industry. Choom is looking to establish a vertically integrated enterprise, from cultivation through to sales, all under a single hip consumer brand.
Choom's application with ACMPR (Access to Cannabis for Medical Purposes Regulations) has received security clearance and is now in the detailed review stage. The company has also submitted a second late-stage ACMPR application, which is in its confirmation of readiness stage. Aggressively preparing to reap the benefits of this license, Choom has retained Cannabis Compliance Inc. to help expedite Choom's initial license applications and ready the company for legalization of recreational marijuana.
One of Choom's greatest strengths is its experience. The managers and directors have decades of experience covering investment, entrepreneurship, business development and pharmaceuticals. Their knowledge of the existing Canadian medical cannabis market ensures that strategic decisions are backed up by real expertise and analytical insight. The company has over five years of experience in the cannabis sector. It knows how to produce naturally grown premium cannabis. Existing license and production assets mean that Choom is well positioned to scale-up rapidly once legalization takes effect, to meet the anticipated Canadian market. This will put it ahead of companies set up in response to the legal change and provide an accelerated path for rapid market growth.
This is exemplified by the company's existing cultivation facilities at Vernon and Chemainus. Both are receiving a state-of-the-art retrofit, with expectations that Vernon will be completed by July, the same month Canada legalizes recreational cannabis use.
The Vernon property will boast 6,800 square feet of growing space, capable of producing 660 kg/year of cannabis for an estimated revenue of $6.6 million, excluding oils. A potential phase 2 of this facility would double the size and enable additional growing capacity of 1,500 kg/year, also doubling the facility's revenue.
While the second facility, on Vancouver Island, is smaller - 4,500 square feet - its retrofit is also slated to be completed by July 2018. Plans include doubling this space, which would add about $9 million in annual revenue, excluding cannabis oils.
It's this sort of established enterprise that will allow Choom to build brand loyalty and position cannabis as another popular consumable, enjoyed in the same way as alcohol and tobacco.
A Growth Sector
A similar approach is being taken by Hiku (CSE: HIKU) (OTC: DJACF), premium cannabis lifestyle brand growing high-quality handcrafted cannabis flower. Hiku's wholly owned subsidiary is a licensed producer of cannabis under the ACMPR that has requested its Pre-Sales License Inspection, the last step prior to receiving a license to sell cannabis under the ACMPR. Hiku's Dominion Facility is a state-of-the-art ACMPR licensed production facility capable of producing approximately 660 kg year of dried cannabis flower. Phase one of its "FUTURE LAB" production complex is slated for completion in the second quarter of 2018, in time for legalization. Utilizing an industry-leading multi-tier system powered by LED lighting provided by Fluence BioEngineering, Hiku's annual production capacity is expected to be in excess of 5,000 kgs, letting it cater to a large part of the cannabis consumer market. The company's merger with Tokyo Smoke is expected to create the first brand and retail-focused craft cannabis producer.
This development is backed up by a $10 million investment from Aphria (TSX: APH) (OTCQB: APHQF), a leading Canadian medical cannabis company. With an expansion strategy based on targeted investment and collaboration with other companies, Aphria has been working to advance growth in the U.S. medical cannabis market. This provides the company with the production and distribution facilities needed to enter the market for recreational cannabis.
While the involvement of medical marijuana companies will be important in the growth of Canada's cannabis sector, the real test for commercial cannabis will be the involvement of consumer brand-based businesses. Their entry into the market will signal faith in the future of recreational cannabis, as well as bringing consumer branding expertise to the sector. One of the first examples of this is the investment in Canopy Growth (TSX: WEED) (OTC: TWMJF) by Constellation Brands. The $42 billion company behind Corona, Modelo and Svedka Constellation Brands has taken a stake in Canopy Growth worth about $191 million, with the option of purchasing additional stakes. It will use this investment to create cannabis-infused drinks, using Canada as a market in which to innovate in anticipation of markets emerging elsewhere.
The growing Canadian cannabis market bodes well for ABcann (TSX-V: ABCN) (OTCQB: ABCCF), a globally licensed, cost-efficient producer of premium quality organic standardized medicinal cannabis. One of the earliest licensed Canadian medical marijuana producers under Canada's federally controlled ACMPR, ABcann has five years of operating experience in the burgeoning medical marijuana space. The company currently owns and operates a fully functioning 14,500-square-foot facility in Ontario, as well as 65 acres of real estate with proper zoning and existing infrastructure in place to support the construction of another production facility of up to 1 million square feet. Along with this growth capacity, ABcann has a healthy cash balance, steady sales growth, an established operations team and global expansion plans, making it well positioned to compete in the rapidly expanding Canadian cannabis industry.
Though it's still several months away from fulfillment, Canada's recreational cannabis market is already providing a diverse range of businesses and investment opportunities. Building on the techniques of medical marijuana companies, the market appears set to diversify into drinks, retail outlets and premium products. This will establish cannabis as part of the existing market for recreational consumables.