Federal legalization may be on the horizon, but being successful in Canada doesn’t mean you’ll make it down south.
by Claire Zulkey
With Joe Biden and Kamala Harris about to enter the White House, there’s one question on many Canadians’ minds: Will the U.S. finally legalize cannabis? According to their campaigns, it’s a real possibility as both have said they support adult-use marijuana decriminalization and federal medicinal legalization.
That could be good news for Canadian cannabis companies, which have built up considerable expertise in growing, financing, marketing and more. Many hope to be part of what could be a US$73.6 billion legal market by 2027, according to Grand View Research, though just because a company is doing well in Canada doesn’t mean U.S. success is a given. Regulations are different, while local companies in states that have legalized have a head start, though there could be room for operations, and in particular smaller and nimbler ones, that play their cards right.
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“Canadian companies that are a few years old and that are the only group in town will have a much larger adjustment,” says Peter Miller, co-founder and CEO of Slang Worldwide, a Toronto-based consumer-packaged-goods company that owns, licenses and markets cannabis brands. “But with money you can buy your way through a lot of that competitive shock. The smaller players with an understanding of their product will have an interesting opportunity.”
Perfect your product
American expansion has been a main focus for Slang, which has a partnership with Canopy Growth. It has expanded into 12 states since 2017, starting with Colorado.
While the company “has the deepest U.S. history in a lot of ways,” says Miller, setting up down south hasn’t been without its headaches. “When we first set up Slang, it wasn’t possible (for a Canadian company) to own licensed businesses or facilities directly, and you still see that in many states,” he notes. “It’s local residents only – they get a head start, which is fair.”
The only way for Canadian businesses to be successful in the States, he says, is if their product already has “incredible traction” in Canada. Otherwise, companies will need to partner with Americans who have industry connections. “If you think you have the capital to enter the U.S., you’re going to face hurdles unless you can acquire or work with companies that have an authentic connection in the States already,” he says. “Building a brand presence from scratch with nothing other than the fact that you’re licensed in Canada is an extremely uphill battle.”
As the American market matures, consumers will become more sophisticated as well. “They’ll see through slick agency presentations and money being thrown at promotions and think more about, ‘Where is this grown? Who are the people behind it?’ If you’re a Canadian cannabis company and your edge is your capital and prior licensing experience in Canada, I think it’s going to be very difficult to create an authentic connection with American consumers who already have a lot of great choices,” notes Miller.
Ashley Chiu, cannabis strategy advisor at EY Canada, agrees that, like in any retail sector, differentiation is key. “The U.S. market is (already) really big and competitive,” she says. “You don’t want to be just another ‘me too’ brand.”
Know the rules
You’ll be in good shape if you can convince the consumer that your product is worth buying. After that, it’s a matter of figuring out the best way to develop products earmarked for the U.S.
Building infrastructure in the U.S. isn’t a requirement, depending on the state, Miller says – he has facilities in Canada, Colorado and Oregon – but when developing a U.S. strategy, think carefully about how to make yourself more competitive from a dollars and cents perspective. For instance, focus on ways to reduce energy costs and agricultural labour expenses, and consider tapping into government support, including through Export Development Canada.
It’s also important to be mindful of some of the differences between the two countries. Canada has strict package requirements that the U.S. does not, for instance. Many states currently grant licensing preference to organizations that are majority owned by a person of colour or to companies that have plans to give back to their community. As well, until legalization is federalized, Miller says, overall American consumer tastes, especially around things like cannabis-infused beverages or, will be less known than they are in Canada.
To prepare for U.S. federal legalization companies must do their due diligence on the regulatory environment, market entry and competitive landscape, as well as build a variety of scenarios into their business model, especially given that legalization isn’t necessarily a sure thing, according to Chiu. “You need to understand what is possible and have a buffer as timing gets delayed and costs get overrun. Hoping that regulations change isn’t a sufficient strategy,” she says. “If the time horizon is 20 years, some of these companies might not be around. It’s all about strategically allocating capital. A lot of Canadian companies struggle with this.”
Find a local partner
One thing Canadian companies can’t do is assume that capturing a small slice of market share will be enough, notes Chiu. “A lot of companies look at the potential of the market and use that as the barometer of what they can get. ‘If I get 1% of this market, will it be very profitable?’ That’s just not the case.”
Sizing opportunities, understanding expansion timing and scale are all critical. Otherwise, she warns, “You can invest and build all these gigantic structures and maybe have to sell them because that demand didn’t materialize in the time you had thought.”
There are two mistakes that Canadian companies must avoid when making the leap to the U.S., says Miller. The first is attempting to expand without local partnerships. “You have to be cognizant of the fact that you’re not just going to come in and start calling the shots where municipal and local regulation is key to your success,” he says.
The other is trying to land in the middle of the marketplace. “If you’re shooting for middle tier quality and low price, there’s so much of that already, except for the limited licence markets, that you’re not going to put a dent in the market,” he explains. “If you’re not going to be the cheapest or do something that differentiates by quality, formulation, market, with a market that’s so competitive and constantly turning over, shooting for the middle is a losing strategy.”