International Cannabis Industry Creating New Business Models
July 14th, 2017
For all the excitement about California and Nevada stateside, the reality is that the lack of a change in the federal scheduling of cannabis still presents a major headache for the domestic U.S. industry. The fact is that one (or many) well-timed and strategic RICO actions by Jeff Sessions could go a long way in dampening a now billion dollar biz on the verge of further massive expansion.
There is absolutely no reason to believe those are not going to happen, particularly the ominous rumblings continuing to emanate from the White House itself on the overall drug issue.
The biggest issue this impacts beyond R&D is investment. That starts with institutional capital. However smaller investors are also affected by all of this of course. At present, it is also this group of investors who is mainly responsible for carrying the industry forward globally.
Outside the U.S., however, the reality already looks different. Getting into the game as a U.S. based investor still carries with it risks common to any international investment. You have to understand the lingua franca.
Cannabis companies domestically looking to diversify their risks also have an interesting opportunity right now. However be warned. The continued federal prohibition on marijuana in the U.S. is now putting U.S. firms at a further disadvantage globally. Experience in the U.S. market does not count overseas or in other markets which require federally legal markets. The only thing foreign cannabis companies want from you at this point is your cash.
Where Should I Look For Overseas Cannabis Investments?
For those unfamiliar with overseas investing, the easiest and simplest place to start is where English is also one of the official languages. No matter what, this industry carries the automatic burden of higher legal costs. If you do not have to pay to have your legal documents translated, you are already ahead of the game.
Match up this requirement and what is going on just north of America’s border and that means Canada. With licensed producers supplying a growing medical market and positioning themselves for both domestic and international expansion, this is the place to look for investments of a more conventional kind in western markets. That said, expect the unexpected. It is unknown what the impact will be here with major firms supplying growing overseas medical markets just as recreational reform hits Canada. Share prices could go up, or just as conceivably, they could drop precipitously. Chances are that the Canadian market producers who are already well established are a good investment for the longer term, particularly if they are already exporting.
Outside of Canada, however and things are still interesting. Israel, for example, has been attracting major pharmaceutical investment for several years now – including from the U.S.
Germany and Australia are also medical markets now just at the starting gate. And canna entrepreneurs in all these markets are also hungry for U.S. investment dollars. If federal legality is your first requirement for investment, these are your markets right now if you are interested in all things grow, manufacture and distribution related.
Realize however that all three markets are still distinctly different from a regulatory perspective. This impacts other issues downstream. For example, in Canada, licensed producers can sell directly to patients. In Germany, all patients must, per federal directive, pick up their narcotics at a licensed apotheke (or drug store).
This also impacts cost and the size of the market, not to mention how fast markets will grow. Again, for now, Canada is coming out on top in a direct comparison with Germany, even though patients are facing just as many issues with health insurance coverage. The cost of the drug is also about 75% cheaper in Canada even without insurance compensation. That means that German patients, when full medical use is integrated here, will have access to about an ounce a month for $12 – one of the most generous models now in the world. Until it gets there, however, the valuable German market will and already is, suffering growing pains that will affect the profitability of particularly shorter term investments. For the next two years, at minimum, the German market will be an investment-heavy experiment in formation.
That said, at this point, the good news is that in all of these markets, cannabis is or is about to be distributed via national chain drug stores. By 2020, Germany’s medical market will be at least as big as Israel’s is today and quite possibly much larger. It could be that this market will rival Canada’s by the time Germany produces its first crops. If you are thinking about investing in either the Canadian or German grow market right now – particularly via a licensed grower or producer – it is going to be really hard to lose money for the next couple of years. Why? It is going to be hard to grow enough cannabis.
Advertising, Data Privacy, Banking, Online Sales And More
Moving beyond the absolute specifics of what the opportunities of these markets are, starting with their formation, there are other things to be aware of outside of the U.S. market.
The first is that many U.S. brands just will not travel easily here. There are several reasons for this. The first obviously is the overwhelming focus on medical rather than recreational. In developing grey-ish markets like Spain, there is still also a desire to keep this industry non-profit and with locally acceptable “brands” such as they are. Such impulses may fit with local culture. Foreign investors, however, are generally looking for ROI.
Add to this another wrinkle is that advertising itself has different restrictions. Even for – and in some cases specifically because of – the focus on medical use.
For example, in Germany, doctors are not allowed to advertise. Drug companies cannot advertise narcotic drugs.
From an investment perspective that goes beyond growing and manufacturing – specifically weedtech – this is another bump in the road to consider. For example, both Weedmaps and Leafly are figuring out how best to conquer a continental market where rules and regulations are literally all over the map. An American-style advertising model, in other words, will not work in Germany currently. In Spain, Holland and Switzerland, however, recent developments are creating opportunities for this kind of business model to be put into some kind of implementation.
Right now, however, “advertising” per se is one of the market limitations investors have to consider when thinking about market growth and at least shorter term potential. Adsense, in other words, may be changing its pot advertising policies. But for now, at least, those are still really only American-only focussed developments – with some potential in medical markets in other countries (starting with Israel).
Further, while this may also boost the revenues if not business models of canna-media that is domestically based in the U.S. in particular, in particular, this does nothing to undergird an advertising base for marijuana media in other regions of the world.
Data privacy and banking law are also issues the industry is facing in Europe in particular that will impact costs and compliance not to mention ROI. That said, the industry is also advanced beyond the U.S. at least. You can use Maestro bank debit cards (a Euro bank network) to pay for pot with plastic in the Netherlands and Switzerland. Not to mention every German, Czech, Croatian and Italian pharmacy that currently carries medical marijuana.
Some battles, by definition, have already been won here – for the simple reason that they were never fought. And that is also good news overall for those considering investing, in whatever way, and in whatever form, in every market outside of the U.S.
What About Investing In Recreational?
It is misleading to think that there are no recreational plays going on in Europe right now (in particular) under the guise of medical if only for now. This starts with every Canadian, Israeli or Uruguayan LP currently making a bid for market entry in Germany. However beyond these investments, there are inklings that foreign capital is making its way to Europe’s legalizing cannabis market fairly systematically now. The Catalonian “Cannabis Club” scene is beginning to tempt U.S. investors used to a more “state” level reform. The risks here, certainly in terms of raids from federal authorities, are far less even if they still exist.
Further, since Spain’s Cannabis Clubs are the only other place in the world right now where semi-public consumption models are being commodified (as well as legalized), this could be an interesting investment for those who do their research and can weather the still-existent market vulnerabilities and still not inconsiderable risks.
The same can be said of investments in Swiss low THC shops, Dutch coffee houses and other investments on the side-lines of what is developing clearly now here. Ostensibly however, if you want to invest in the recreational market outside the U.S., the best place to do that is still Canada. Everywhere else should get put on hold for at least the next 24 months.
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