A growing number of American companies are wading cautiously into Canada’s competitive cannabis industry in search of new revenue streams and, in some cases, relatively cheap assets. 

Executives at a variety of U.S. cannabis companies – from technology and events firms to beverage and edibles businesses – told MJBizDaily that they find Canada’s centrally regulated market appealing. 

And despite Canada’s overproduction of cannabis and falling prices, some U.S. executives see more opportunities north of the border versus core U.S. markets where sales are declining on a year-over-year basis.

That’s especially true in more mature state markets such as Colorado, Nevada and Oregon.

“The U.S. is a high-growth market in (the) aggregate. But if you look at it on a state level – excluding recently legalized states, plus California – market growth is beginning to flatline if not slow significantly,” said Mitchell Osak, president of Toronto-based Quanta Consulting.

“For growth-focused, publicly listed U.S. companies, at a 10,000-foot level, Canada could represent an appealing market based on market size and regulatory clarity.” 

According to New York-based Cantor Fitzgerald, Canada’s recreational cannabis market grew 21% in the second quarter on a year-over-year basis, while the financial services firm estimates U.S. growth will be just 1%.

New growth 

In addition to sales trends, Osak noted that Canadian assets are relatively cheap at the moment, and the lower Canadian dollar makes M&A in Canada more appealing in some cases.

“For U.S. bargain hunters with cash, you could pick up a lot of quality assets from hungry sellers on the cheap,” he said.

That was the route taken by California-based cannabis technology company Blaze Solutions.

In May, Blaze acquired Vancouver-based dispensary point-of-sale software company Greenline for an undisclosed sum.

Chris Violas, CEO of Blaze, said the company was looking for new growth outside of its core markets. 

“There’s growth in the U.S., no doubt, and we’re excited about that. But, at the end of the day, there is a limited (total addressable market). So we asked, ‘Where could we go and be smart and win some market share?’” he told MJBizDaily. 

“From our point of view, it’s strategically looking at getting more market share without cannibalizing our own technology – and finding a partner who can open up that new market.” 

In a news release announcing the acquisition, Violas said the purchase gives customers the “ability to expand their footprint into the U.S. or Canada using the same software provider.”

“This is essential for increasingly sophisticated cannabis retailers in states near the border,” he added, citing Michigan, New York and Washington state as examples.

Edibles companies eye Canada

So far, most U.S. cannabis businesses expanding into Canada have been ancillary companies that don’t touch the plant – as opposed to cultivators and retailers.

But some U.S. infused product manufacturers are heading north of the border to sign deals with Canadian companies, including licensed producers.

The licensing and partnership deals allow the Canadian companies to produce edibles and other infused products according to manufacturing specifications of the U.S.-based company. 

“Some of the U.S. companies that would want to enter Canada are edibles brands looking for new revenue opportunities and ways to extend their brands,” business advisor Osak said.  

“Edibles are growing a lot in the United States, albeit from a small base. U.S. edibles companies would look to license their formulations and brands to Canadian LPs,” he said, adding that some have already done this successfully. 

One U.S. edibles company eager to expand into Canada is California-based Kiva Confections, which announced a deal in May with Montreal-based license holder Greentone. 

The arrangement will allow Kiva to offer its edibles at retail outlets across Canada.

Ben Schultz, who heads up new market expansion for Kiva, said the company has traditionally expanded into new markets through licensing and partnership deals. 

Schultz said such arrangements are one way of mitigating risk: The company doesn’t have to to shell out big bucks to build its own manufacturing facilities. 

“That’s the expansion look for us. From a cash-flow standpoint, we haven’t had to spend $10 million to set up in Canada, which plenty of people have done, for better or for worse,” he said. 

“We found a great partner who has the facility, licenses and team in place to help us manage and navigate. I wasn’t an expert coming in on the Canadian rules and regulations, so we’ve had to rely heavily (on our Canadian partners) to help us navigate the various nuances of the Canadian market.” 

Kiva wasn’t dissuaded by Canada’s hyper-competitive edibles market or the country’s patchwork of provincial regulations. 

“We have a lot of experience in the U.S. rolling out our product to different states and territories that have totally different rules – way more different market-to-market than Canada,” Schultz said. 

“We’ve got a lot of experience adapting our brands and products to the regulations of each location.” 

Hall of Flowers goes north

Another U.S. company seeking to make inroads in Canada through a partnership is the business-to-business cannabis trade show operator Hall of Flowers. 

Hall of Flowers Canada – set to take place in Toronto in mid-September – offers a retail environment that helps brands and retail buyers do business.

According to a news release, Hall of Flowers Canada intends to bring together at least 200 brands and 1,000 retail leaders.

Dani Diamond, Hall of Flowers founder and CEO, called his company’s expansion into Canada a “calculated risk.”

But it’s not without risk. Lift & Co., the largest cannabis trade show in Canada, went bankrupt last year before some of its assets were scooped up by Virginia-based events company MCI USA. 

Diamond said the opportunity to bring the Hall of Flowers model to Canada presented itself when Krista Raymer, co-founder of the Vetrina Group, a retail cannabis consulting firm based in Toronto, reached out with the idea of bringing the event up north. 

“Working with us was a way that the Hall of Flowers team was able to mitigate risk with our knowledge and relationships within the Canadian market,” Raymer said. 

“We have the boots on the ground, which might otherwise constrain the Hall of Flowers team during the day-to-day operations. And we’re able to reflect the nuances that are vital to making the show a success up here.”

Minimizing risk via horizontal approach 

Other U.S. companies recognize opportunity in the Canadian market, but they also see it as a way to prove out new cannabis products in one of the few federally-regulated recreational markets in the world. 

“We built our plan to de-risk as much of the unknown as we could,” said Paul Weaver, head of cannabis at Boston Beer Co., a well-known U.S. craft brewer. 

Rather than making a big splash by buying a cannabis producer and bottling plant, Boston Beer signed on strategic partners in Canada to produce nonalcoholic THC-infused teas dubbed TeaPot. 

The company launched its product in Canada via a three-tier, multifaceted supply-chain partnership with Peak Processing Solutions in Windsor, Ontario, and Entourage Health Corp., an Ontario-based grower and distributor.

“This is the new state of the union for the industry – having partners, collaborating and spreading out your capital a little bit. The entire industry is embracing a more horizontal approach.”

Weaver said big risks typically involve significant capital allocation, over-investing in one idea and not having the flexibility to pivot. 

“We focus on what we can control. … That’s what’s going to allow us to act quickly when the dust starts settling in some of these markets,” Weaver said, referring to up-and-coming European markets. 

“Flexibility in Canada allows us to test, learn and build an amazing product around TeaPot.”

Source: https://mjbizdaily.com/us-cannabis-companies-tread-cautiously-into-turbulent-canadian-market/