What Canada’s top CEOs say about cannabis ‘commoditization’

While a shortage of marijuana is expected to precede any glut by a number of years, the potential for cannabis commoditization is already a consideration for many licensed cultivators in Canada.

Greg Engel, CEO of New Brunswick-based Organigram, said commoditization, at least as it relates to cannabis, boils down to two things:

  • Excess supply over demand for standard and low-grade cannabis.
  • Products that aren’t differentiated.

Greg Engel, Organigram

Places like Colorado have seen severe price compression on nonpremium marijuana products, but successful premium products have been able to avoid the commodity trap by fetching higher prices.

Canada’s licensed cultivators are already taking action to differentiate their companies and products and to build sustainable brands for the medical marijuana and pending recreational market.

“The key for any company to avoid being pulled into a commodity market is a differentiated product, and that’s our strategy going forward,” Engel said.

Executives cite differentiated product examples such as premium flower and medicine and, down the road, derivative-based products, edibles and beverages.

Marijuana Business Daily asked CEOs of Canada’s leading marijuana companies to share their views on how to avoid falling into the commodity trap.

Will cannabis become a commodity in Canada?

Terry Booth, Aurora Cannabis

Aurora Cannabis CEO Terry Booth: “I think it will become commoditized over time. You’ve got five years before that happens. It will always be a cash crop, because it is very difficult to grow, but there’s going to be a lot grown.”

Is “commodity” the right word?

Canopy Growth CEO Bruce Linton: “I use the word ingredient rather than commodity. Dried cannabis flower is increasingly becoming an ingredient. The question is, do you have processes and recipes to turn the ingredient into high-value goods?

“A commodity is something like wheat. Almost no wheat farmers make the bread. If it is your finished good, you’ve done your job.”

How can cultivators avoid the commodity trap?

Linton: “The value that is able to be created is not purely by selling dried cannabis flower, but the appeal of it as an ingredient and how much you can create. So that’s where you start getting into extraction, formulation, finished packaged goods.

Bruce Linton, Canopy Growth

“The pressure on the price of the ingredient will have almost no bearing on the final sale price, and the real question is: ‘Are companies able to create those finished goods – medical or adult access – that really are different, brandable, desired and sought out and paid for?’

“You have to be an inexpensive producer, but you have to do a lot more than that, like vertical integration and creating things that don’t exist yet.”

 

What’s a key metric to focus on?

MedReleaf CEO Neil Closner: “A good metric is the price you can get for your product. Companies growing good product are able to charge a higher price.

“That validates our product and tells me it’s differentiated in a way that makes people want to spend more for it.

Neil Closner, MedReleaf

“Another is customer churn. Our customers stay with us, which speaks volumes about not only product quality but the other important measures like customer service and support.

“The way we discuss quality is from a quantitative and a qualitative standpoint. From an objective standpoint, we look at batch-to-batch cannabinoid content consistency, potency, the bio-burden – does it need to be irradiated to pass Health Canada’s standards, consistency of availability?

“Those are the objective measurements.

“Then there is the subjective side that leads a lot more into the recreational business. The subjective measurements include how it smells, tastes, more of the thing a wine connoisseur would measure wine by.”

How do you get a higher price for your product?

Cronos Group CEO Mike Gorenstein: “Consumers look for similar things in cannabis as they do in alcohol.

Mike Gorenstein, Cronos Group

“Like alcohol, price points will be relative to customer experience. When you go to a nice restaurant, you select a fine bottle of wine or scotch because of taste, aroma and brand, not alcohol content.

“When’s the last time you went out and ordered a glass of Everclear?

“Alcohol as an active ingredient can be thought of as a commodity the same way that THC can be thought of as a commodity. But there are much more diverse effects you can get from cannabis than alcohol because of how many more active ingredients there are.

“So being able to deliver different psychoactive effects and different tastes and aromas will ultimately drive differentiation and price points.

What if companies fail to get a higher price for their product?

Closner: “For them, it will be a race to be a commodity grower. To be farmers. That’s not a business I want to be in.

“That’s why we think branding and quality assurance are important, and why we have the largest research and development department in the business.

“We were the first producer to come out with a capsule, and now we’re waiting for approval to sell our gelcap. We came out with a cream.

“A good chunk of our time is spent on new product development so we can continue to differentiate on products.

“As regulations evolve and new form factors emerge, those that deliver on a unique or elevated experience will command a premium – as is the case in every industry.”

MedReleaf, Canopy Growth, Aurora Cannabis, Cronos Group are traded on the Toronto Stock Exchange. Organigram‘s shares are listed on the Venture Exchange.

Matt Lamers can be reached at [email protected]

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5 comments on “What Canada’s top CEOs say about cannabis ‘commoditization’
  1. Bryan Sherman on

    As the wholesale price continues to fall the companies that will survive will be the ones with the lowest cost of production and the most consistent quality.
    A properly designed Environmental Control System will deliver Precise Control with Half the Energy and mitigate four of the biggest problems facing the Cannabis Industry; Energy Use, Environmental Control, Contamination and Water Conservation.
    Lowest cost of production coupled with precise, sterile, environmental control (I.E. Consistent High Quality) will allow you to compete long into the future when the world market opens up and the prices come down.

    Reply
  2. jake sanchez on

    I think they are smoking their own pot. They are applying past marketing practices to the MJ market. They fail to realize economies of scale when barriers, especially international and state borders break down and commerce truly opens up. Countries such as Colombia, Mexico, China, and others will continue to push down prices as they grow and export is allowed. Growing technology is improving that will allow anyone to grow great pot. Hardly anyone is using modern farming techniques electing to go with hand tilled and mixing of soil, using expensive hardware for lighting, water, etc. All of this will change as LED technology gets more sophisticated and less expensive. If it is truly medicinal, which I believe, why is it so expensive. The people that need it most are the masses. It has too be affordable but today’s prices , especially CBD oils, are way too high. This will change. MJ has always been a commodity, they call it a weed for a reason, and will always be. Masking around fancy products may help some but the market is the masses and if prices are too high they will grow and extract it themselves as people have done for thousands of years.

    Reply
    • TJ on

      It has dropped to $100/lb in Oregon. That’s about 20 cents /gram. CBD is going to drop in price drastically as more hemp is grown. These billion dollar companies will crumble in value in the next 3-8 years, depending on law changes (especially regarding importations from equatorial countries).

      Reply
  3. SRH on

    I was just looking at vodka at the store. At the low end, I could get a bottle for $8 and at the other end I could Grey Goose for $25. Is one vodka really worth 3 times more than another? As a commodity the answer is no. As a product, it is worth what someone will pay for it. I think the case for differentiation and branding in the cannabis market is strong. In my opinion, its like vodka. You will see basic, low cost cannabis but will also have a variety of products at higher price points. There is a commodity component but the market will be much more diverse and differentiated.

    Reply

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