June 10, 2019 by Sujay Seetharaman

This year, the gift bags of celebrities at the Oscars included chocolates laced with THC, CBD skincare, and membership to a Cannabis-friendly club in Los Angeles. Sure, if you aren’t rich and famous, all of that is going to cost you thousands of dollars but let’s take a second to acknowledge just how popular and pervasive Cannabis products have become.

Zora Milenkovic, head of drinks and tobacco at Euromonitor International said that “Within 10 years, Cannabis will be a regular part of daily routines”. We think that the continued growth of the Cannabis Industry and the integration of CBD into various everyday consumer products, unburdened by stigma, sets a good precedent for what Milenkovic said.

A search on PipeCandy’s Agent Sift for e-commerce websites containing the keyword “CBD” displays over 18,000 results indicating that the revolution of the Cannabis Industry has already swept its way through consumer product categories such as food, beverages and wellness supplements.

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In this blog post, we estimate the market size of the Cannabis industry and take a look at the evolving legal landscape, trends, and issues taking shape in two of the biggest Cannabis hubs – the US and Canada.

1. Which Industries Benefit from Legal Marijuana?

All too often, terms like CBD, Hemp, Marijuana, and Cannabis are tossed around together while they mean different things. For the benefit of educating ourselves and those who may be unfamiliar, we thought it’s a good idea to dissect what each of these terms means.

The Cannabis plant consists of three main species – Sativa, Indica and Ruderalis. The first two are primarily used for consumption. Hemp and Marijuana are derived from them. Hemp refers to varieties of Cannabis that contain 0.3% or less THC content by dry weight. It is involved in the production of resources such as food, clothing, paper, ropes, etc. Marijuana refers to Cannabis varieties that contain more than 0.3% THC by dry weight. THC stands for Tetrahydrocannabinol. It is the psychoactive strain in the Cannabis plants that induces the ‘high’. CBD means Cannabidiol. It is one of some 113 identified cannabinoids in Cannabis plants and accounts for up to 40% of the plant’s extract. In the US, Hemp and Hemp-derived products (such as Hemp-derived CBD) have been federally legalized under the Agricultural Improvement Act of 2018 (also called the 2018 Farm bill) while Marijuana remains illegal under the Controlled Substance Act.

The global Cannabis Industry, both legal and illegal was estimated to be around $150 billion in 2018. By 2025, it is predicted that legal Cannabis alone will be worth $166 billion or 77% of the market. Experts such as the Brightfield Group predict that the hemp-derived CBD market alone will reach $22 billion by 2022. What’s more interesting is, according to a stat from G2 Crowd, a total of 283,442 jobs are expected to be created as a result of the legalization, by 2020!

2. How much is the Legal Cannabis Industry Market worth?

The legal Cannabis market constitutes about 8% of the global Cannabis market or $12.2 billion and is poised to grow at a CAGR of 38% in 2019. The US represents about 90% of the legal market, followed by Canada and the Rest of the world.

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Below, we break down the market estimates of the US and Canada by their states and provinces respectively.

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Canada legalized recreational Cannabis on October 17, 2018. In fact, according to the same G2Crowd report quoted above, Canada’s overall spend on legal cannabis is expected to rise up to 58% in 2019. Growers now get licensed by the Federal government, and then individual provinces determine how the product gets distributed and sold. In the US, Medical marijuana is legal in 33 states and Recreational in 10. In Europe, the question of legality is a bit diverse. You are not likely to be punished for minor possession in Spain, Portugal, Italy, Ireland, Slovenia, Croatia, Bulgaria, Latvia, Belgium, and the Czech Republic. On the other hand, Greece, Cyprus, Hungary, Sweden, and Finland have some of the harshest drug laws; they consider all types of drug use a criminal offense and possessors may be faced with prison time.

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3. How will the legal CBD benefit Medical Cannabis Industry?

Right now, the buzz is all about CBD. CBD is one of the many hundreds of cannabinoids found in the Cannabis plant. The ingredient is being credited with a growing list of health benefits from preventing insomnia, anxiety, epilepsy, arthritis, chronic pain, to curing a few other ailments given its sedative, anti-inflammatory, antibiotic, pain relief, bone healing, and appetite stimulant properties, and, as a result, companies from virtually every consumable category, including beverages, dietary supplements, skincare, and pet products, are actively exploring business in the market.

The growth of low and non-alcoholic beverage consumption (like CBD water) and the shift from cigarettes to vaping provide an opportunity for Cannabis to replace alcohol and tobacco on social occasions.

Vitamins and dietary supplements are expected to be the largest Cannabis-related category by 2025, with 2 percent of sales to come from products containing CBD.

Global sales of packaged food with CBD are expected to double over the next two years, further blurring the lines between consumer health and food.

4. Cannabis Industry in the US

The hemp-derived CBD market in the US was an estimated $500 million, growing at a 40% CAGR.

The US Farm bill, passed in December 2018, makes hemp and hemp-derived substances legal under certain circumstances although it doesn’t create a system in which people can grow hemp as freely as they can grow tomatoes. The bill de-classifies hemp-derived products, including CBD, from the Schedule 1 status but it does not legalize CBD generally. It does give it the privilege of crossing state lines though, unlike THC. While the Farm bill comes as a bit of a breather, the FDA has yet to issue regulations regarding CBD and until it does, it continues to treat CBD as a Schedule 1 substance according to US Federal law. Given this scenario, the legality of CBD remains a gray area and a significant amount of research on the part of the consumer is recommended in knowing who the producer is and whether their products are legal.

5. Cannabis Industry in Canada

Market estimates for the value of hemp-derived CBD in Canada are limited.

Canada became the second country in the world to legalize Cannabis (after Uruguay). Like the US, Canada has its own provinces, each of which has its own laws regarding Cannabis. Although the Cannabis Act applies to all of Canada, depending on where shoppers live, their ability to purchase Cannabis may differ. The Cannabis Act ruling states that Cannabis must be “legally acquired”, that is, it must come from an approved provincial or territorial retailer. Any mention of CBD is missing in the announcement which has left both consumers and retailers baffled. Some say that since recreational marijuana is now legalized, it implicitly legalizes CBD as well. Industry experts, however, say that since CBD in and of itself its part of the Cannabis plant, it will be subject to the same restrictions as THC, Hemp, and Marijuana.

6. How are Cannabis induced products going mainstream?

CBD-infused products have made inroads into mainstream retail stores such as CVS, Walgreens, Neiman Marcus, and Sephora, despite the ongoing disputes around its legality. The FDA still considers the addition of CBD to food and health products without its approval illegal. The agency has been cracking down on businesses making medical claims. Early this year, in New York City, the Department of Health ordered that restaurants, bars, and other venues stop selling CBD-infused edibles as the FDA maintains that CBD is not “safe as a food additive”. It’s probably due to this that big-box retailers like Target and Walmart are keeping their eyes peeled open for any regulatory changes before putting CBD on their shelves.

Research shows that nearly 7% of Americans on average have already used CBD in some form. The Cowen survey found that CBD use is highest among consumers aged 18 to 34. From a use-case perspective, Tinctures (liquid extracts) account for the lion’s share of the CBD market (44%), followed by Topicals (26%), Capsules (22%) and Beverages (19%).

On the distribution front, much of the sale continues to happen through Dispensaries. Popular Drugstore chains such as CVS, Walgreens, Rite Aid, and Luxury retail stores like Sephora, Neiman Marcus and Barney’s have also opened their doors.

In fact, CBD is going so mainstream that even consumer-goods and media maven Martha Stewart is hopping on board. Stewart announced in March this year that she’s teaming up with Canopy Growth to design and produce new CBD lifestyle products for pets and people.

Designer Shoe Warehouse (DSW) has also signed an agreement with Green Growth Brands to sell its Seventh Sense brand which offers CBD-infused products including muscle balms, body lotions, body washes, and foot creams. Real estate provider Simon Group announced earlier this year that it has partnered with Green Growth Brands to open 108 CBD shops inside its malls.

Anheuser-Busch, the maker of popular beer Budweiser is already exploring the value and viability in the direct selling approach to selling CBD products through a $100 million joint venture with Tilray Inc., a leading Canadian cannabis company.

A number of similar deals worth millions of dollars continue to happen yet all are not well upstream. The supply chain is riddled with issues which may take years to be ironed out.

7. The Cannabis Industry Supply Chain

Firstly, there is a supply problem. Demand is so high that growers are not able to keep pace. This has left cannabis companies in some regions unable to meet consumer demand, forcing them to temporary closure or to constrain their opening hours as a result of the shortage. The supply problem rolls back to the fundamental challenges involved in producing industrial hemp.

The cultivation techniques for hemp have yet to be mastered. For decades now, the cultivation of hemp and marijuana has been illegal with growers employing their own techniques, giving rise to an industry that has grown to be extremely fragmented with different growing techniques.

David Williams, an agronomist at the University of Kentucky who studies hemp was quoted as telling CNBC “Most hemp farmers are growing the plant like a tomato, a process that’s expensive and intensive. This model works for marijuana because you want the flower to look and smell nice. For hemp that will be used to extract CBD, this system is incredibly expensive and unnecessary since you only care about what’s inside the flower”

Secondly, farmers typically don’t know how much THC their plants contain until the hemp has been harvested, dried and CBD extracted. A number of studies by federal regulators have come to find that many products don’t actually contain the measure of CBD they claim to. This is also due in part to the non-presence of federally regulated lab tests. Thus, the growing and testing phases are both in experimental mode, reflecting just how nascent the supply chain is.

The experimentation approach spills over to the merchandising side of things as well, where retailers and brands are only beginning to derive correlations between personas and product types. They are yet to figure out what products sell best to which demographic.

Scott Mandell, President of Cannabistry Labs, a scientific research and development company, told PipeCandy that “Some are using cannabis for medical purposes, some are looking to incorporate cannabis into their daily well-being, while others simply want to get high. So from a merchandising standpoint, you can either try and take a shotgun approach and try and be all things to all people, which is usually quite challenging to pull off, or you can pick a lane (or two) and try and cater to a specific subgroup of consumers”

8. Wild wild west

Catherine Lang, a retail analyst with Kantar Consulting, predicts that convenience stores will be among the next retailers to start selling CBD products. There are over 200,000 convenience stores in the US and Canada combined, and this massive footprint is staggering when we consider the sheer size of the customer base that it stands to unlock for CBD.

The major challenge for these stores would be to effectively market CBD-infused cosmetics and drugs. They can run into trouble if they make unverified health claims. This has happened before. Target pulled down hemp oil extracts from its online store in 2017, a move likely related to the DEA’s warning in January 2017 that it considered hemp extracts a Schedule 1 drug, like marijuana, under the Controlled Substances Act.

Also, unlike the footprint of a big-box retailer that can run into the thousands, convenience stores number in the hundreds of thousands, which mandates the cannabis industry to become more responsible, transparent and structured before its products land in their shelves of every store at the corner of the street.

Right now though, it would seem fair to say that the Cannabis industry is the Wild Wild West, making the education of paramount importance to everyone involved in the value chain from growers to scientists to retailers to consumers and industry experts.

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Sujay Seetharaman

Market Analyst @ PipeCandy

Currently donning the Researcher's hat. Talks to himself.