The cannabis market has a huge potential for investors and companies such as Cronos Group, Imperial Brands and West Coast Ventures Corp. (OTC: WCVC) prove it.
The cannabis market and its enormous potential – its size could increase tenfold in the next ten years – are attracting more and more investors, who now see it as a consumer product like any other. While the evolution of national legislation will be decisive, manufacturers are already on the lookout.
Are the days of amateur gardeners secretly growing weed at the bottom of the vegetable garden gone? With its gradual legalization in many countries, cannabis whets the appetite of investors and brokers, who see the cultivation of this psychoactive plant as a lucrative source of investment. “Expansion prospects”, “growth opportunities”, “value chain”. For British asset manager Schroders, the culture of marijuana has indeed shifted from being “entertainment for the insiders only” to being a popular investment product in the business community.
“A consumer product like any other”
“Over the past two years, cannabis has become an increasingly important target for investors, mainly due to rapidly changing legislation and global opinion,” Andrew Howard, director of sustainable research at the UK fund manager, told AFP. “Even if we lack visibility” on the legal framework, “the growth potential is considerable”, adds the analyst, who claims a pragmatic approach to this so-called soft drug. From an economic point of view, “cannabis is a consumer product like any other,” he insists.
Currently, 25 countries, including Australia, Canada, Uruguay, Mexico, South Africa, Switzerland, Israel and Turkey, have legalized all or part of the market for recreational or medical use. And the list is expected to grow in the coming years.
A potentially huge market
“For the moment, the market is mainly focused on the United States and Canada, but even in Europe, things are starting to move,” says Nikolaas Faes, an analyst at Bryan Garnier. “Globally, the amounts are still small, but it will inevitably increase.” According to the Franco-British investment bank, the legalized global cannabis market could reach $145 billion by 2028, up from $12 billion last year. According to Schroders, the market could reach $130 billion in ten years.
“There’s a lot of money at stake. It whets the appetite,” confirms Emmanuelle Auriol, a professor at the Toulouse School of Economics (TSE), for whom a “taboo has fallen”. “At first, investors were afraid for their reputation. Today, public opinion has changed.”
Colorado is the first state in the US to legalize marijuana for medical and recreational use and companies engaged in the cannabis industry are experiencing continuous growth. West Coast Ventures Corp. (OTC: WCVC) found its own niche and combined fast-casual dining and CBD sectors, becoming America’s first CBD restaurant stock. In the first year of operations alone (2018), the company recorded revenue of more than $3 million and it is expected to grow even higher in 2019 and 2020.
Cigarette makers and alcoholic beverage giants are part of the dance
Since 2017, several alcohol giants have taken the plunge, such as Constellation Brands, the parent company of Corona beers, which has invested $4 billion in a Canadian company specializing in cannabis production, Canopy Growth. “We are studying the data (…) We have to give ourselves 12 to 18 months to fully appreciate the situation,” said the CEO of Pernod Ricard, Alexandre Ricard, at the general meeting of the French spirits group at the end of November.
The cigarette companies have also joined the dance. The Altria group, manufacturer of the iconic Marlboro, has thus taken a $1.9 billion share in the Canadian Cronos Group. Imperial Brands has also invested in British biotech Oxford Cannabinoid technologies (OCT).
“For alcohol manufacturers or cigarette companies”, who fear that their market will be “cannibalized” by the marijuana industry, “the stakes are high”. “But cannabis is also of interest to the pharmaceutical sector, and even multinationals such as Coca Cola,” observes Emmanuelle Auriol. For Andrew Howard, “two types of companies invest in the cannabis industry: young companies specialized in this market and, increasingly, large consumer goods companies, which want to “diversify their product portfolios.”
Uncertainties about the evolution of legislation generate volatility
On Wall Street, this growing interest in the marijuana industry has led to spectacular movements in recent months for start-ups in the sector, such as Tilray or Canopy Growth, whose stock soared before falling sharply in early 2019. “We are in very young and therefore very volatile markets,” explains Nikolaas Faes of Bryan Garnier. “For investors, this is a sector with a higher than average risk”, partly due to the “uncertainties” that weigh on legal developments in several countries, he adds.
What is there to fear of a “bubble”, likely to go up in smoke? The market “has the potential to grow rapidly” but its future will depend largely on “the orientations taken by policy makers”, Andrew Howard said, who believes it is necessary to “make a distinction” between companies that are “better placed” to adapt to change and those that are “less prepared”.