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.
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?
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.
“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.
“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.
“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.
“We were the first producer to come out with a capsule, and now we’re waiting for approval to sell our gel cap. 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 mattl@mjbizdaily.com
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