Anticipation around Canada’s second wave of legalization — when commercial edibles, beverages, topicals, and extracts become legal — is high. Licensed producers are racing to develop the most appealing products to reach new consumers, enticed by the novelty of legal cannabis gummies and chocolates.
But for many legal markets in the United States, this is nothing new: Colorado and Washington were the first states to allow the sale of cannabis-infused edibles in 2014. Five years later, there’s a lot Canada can learn from these more mature markets.
Lift & Co. spoke with Vivien Azer, a New York-based senior research analyst at financial services firm Cowen who specializes in the beverages, tobacco and cannabis sectors, to get an idea of what the Canadian market can take away from its neighbours to the south.
1. Child safety regulations are critical
One of the primary challenges to safely distributing edibles such as chocolates and sweets is ensuring they remain out of the reach of children. Edibles markets across the U.S. struggle with this, and Azer believes it poses a similar threat to the Canadian market, especially as licensed producers (LPs) begin to invest in edibles.
“Where the regulation is nuanced is certainly at the state level. Different states have different regulations when it comes to product potency and what’s permissible there,” Azer says.
In Washington State, for example, regulators ordered a cease in production of cannabis-infused gummies and hard candies in October 2018, believing they posed too high a risk to children. The decision was reversed just two months later after outcry from cannabis firms in the state, allowing production of gummies and candies but with guidelines on colour and shape to limit their appeal to children.
This issue is certainly top of mind in Canada. Health Canada has established strict rules on labelling to reduce the appeal of edibles for children, and the Task Force on Cannabis Legalization and Regulation has recommended an outright ban on products that appeal to children.
But the Washington State case is evidence of how quickly tensions between producers and regulators can build, even with both parties aiming to do what’s best for consumers. It’s a case Canada can learn from as Legalization 2.0 nears.
2. Novice consumers are a largely untapped market — with huge potential
First-time cannabis consumers represent the largest untapped market in both Canada and the U.S., Azer says. As the second wave of products hits the market, producers are striving to find ways to reach this demographic. To Azer, this strategy is sound: it’s one that’s proving effective within mature edibles markets in the U.S. The best way to reach these consumers, she says, is with low-dose offerings.
“One of the areas where you are seeing some success is in lower dose offerings, that’s something where there’s been a lot more innovation recently,” Azer explains, highlighting 10mg candies as examples.
“As we’re seeing these brands get more sophisticated, we’re seeing the introduction of lower dose variants. The hope would be to expand the market opportunity of those products, [which are] more appropriate for someone who’s newer to the category.”
3. Innovative product delivery is a good way to reach first-time consumers
According to Azer, one of the biggest challenges cannabis product developers are facing is shortening the time it takes for consumers to begin to feel the effects. As Canadian LPs strive to reach a niche of first-time consumers around legalization 2.0, shortening delivery time will be essential to bringing new consumers in.
“[Consumers] think alcohol is a substitute. With alcohol, you know you feel the onset in 10 to 15 minutes, where cannabis can take as much as an hour and a half,” Azer says. “We view that as a structural challenge for consumers. I’m not going to go have a glass of wine tonight and say to myself, ‘Oh goodie, I’m going to feel this in an hour and a half.’”
This challenge poses an opportunity for research and development within the Canadian market.
“Legacy products are set to take anywhere from 30 to 90 minutes, which we view as kind of unacceptable for consumers,” Azer says. “It’s going to have to come down to innovation around speed of delivery … that’s the real opportunity that Canadians have, is to innovate around R&D around delivery and duration of effect.”
4. Cannabis beverages might not live up to the hype
Cannabis beverages are expected to reach the legal market mid-December, at the same time that edibles, topicals, and extracts do.
Buzz over weed-infused drinks has been high in Canada, with Truss CEO Brett Vye estimating to Bloomberg that beverages will make up 20-30% of the Canadian market. A June 2019 Deloitte report estimates the annual Canadian market for cannabis beverages will be worth $529 million, but says “realizing this sizeable market potential will take some time” as a full range of products won’t immediately be available.
To Azer, U.S. cannabis markets tell a different story. She estimates that beverages currently only make up 1% of market share, while edibles take up just 12%. She warns against being overly “bullish” in anticipating how much of a difference ingestibles will have on the Canadian cannabis market, unless LPs put work into making these products more appealing to consumers than they currently are in the U.S.
Estimates between 20-30% are “quite aggressive, and certainly not a reflection of the U.S. experience,” Azer says. “I think the biggest thing to learn is understanding why category development is so different in the U.S. and what gives them confidence that the major category development would look so different in Canada.”