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Here's What You Should Know About Canada's Emerging Weed Industry

"The legalization of recreational cannabis "next summer" will usher in a globally competitive, sophisticated and lucrative new sector.

BLAIR GABLE / REUTERS Drying marijuana plants.

The year ahead is a pivotal one in Canada's economic history. The legalization of recreational cannabis "next summer" will usher in a globally competitive, sophisticated and lucrative new sector.

While most Canadians are now familiar with the expected economic scale of the cannabis sector — an estimated base market of $8.7 billion and an ancillary market of over $22.6 billion — the business trends shaping the Canadian cannabis sector are still relatively unknown to those outside the industry, but important to know as legalization approaches.

Here are the five major trends shaping Canada's cannabis sector:

1. Consolidation

Licensed producers, or LPs, are at the core of the cannabis sector. These are the companies — many of them publicly traded — that hold the licenses to grow, harvest, dry, trim, cure and package cannabis. Currently, there are only 84 licensed production facilities in Canada — but the numbers are likely to grow rapidly as a result of Health Canada recently introducing changes to streamline the application process, and so, another 200-plus are expected to come to market in the very near future.

The past few months have been defined by a frenzy of LP mergers and acquisitions.

This trend is expected to continue into 2018, narrowing the field to just a few key players much like Coke and Pepsi.

Some of the biggest stories of the year were the strategic maneuverings of these players, including Aurora's desired takeover of CanniMed at the same time that CanniMed was attempting to acquire Newstrike. In the past two weeks, we saw Aphria — one of Canada's largest LPs — making a major investment in the space by taking a major position in the DOJA/Tokyo Smoke merger.

"This trend is expected to continue into 2018, narrowing the field to just a few key players much like Coke and Pepsi."

New entrants to the market will need to focus on niche artisanal appeal or be prepared to compete with much bigger players. For consumers, the impact of consolidation should initially mean lower prices as the large players vie for consumer brand loyalty — but perhaps fewer brand choices at retail locations.

2. Product innovation

For many Canadians, "cannabis" still brings to mind a rolled joint or maybe a pipe. But, as those engaged in the medical cannabis industry know, the innovations in ingestion options are exploding. The list now includes include vaporizers, edibles, patches, drinks, lubricants and mouth sprays, among others. These products are expected to significantly change the recreational habits of Canadians as they have for patients.

Imagine going to a cannabis retail shop on New Year's Eve and being able to choose the right cannabis products for the evening you will have. Do you have plans for a cozy night by the fire strain or a raucous night of dancing? Are you rolling joints or are you in the mood for an edible? Have you tried the cannabis-infused wine? What about the amazing cannabis products for your next-morning hangover smoothie or infused tea?

3. Uncertainty

Prime Minister Justin Trudeau recently announced that cannabis will become legal in Canada sometime "next summer," and not on July 1 as had become the public expectation. While not a substantial change, it is illustrative of the type of delays, regulatory adjustments and compliance additions that those involved in or working with the industry have come to expect — both on federal and provincial levels.

A recent E&Y Report highlighted that the cannabis sector continues to face an uncertain operating landscape. Many of the rules that govern the recreational industry have yet to be finalized. As well, a wave of new competitors — particularly with cannabis products — are expected to enter as existing lifestyle and luxury brands expand into the sector.

Strong regulatory and market uncertainty means that regardless of the size of the company or investor, organizations will need to be prepared to be nimble and remain highly entrepreneurial.

This means companies will need to have the ability — despite organization size — to rapidly seize on unexpected opportunities, quickly hire new talent and pivot as needed. (It also means that if you have done any work in quality assurance for either food or pharmaceuticals, you have likely been contacted through LinkedIn a about a job in the sector.)

Similarly, investors should proceed with the understanding that this is a volatile landscape — so much so that the TSX recently suspended the trading of shares of several leading Canadian cannabis companies because of sudden stock price swings."...

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