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Don't Expect 'Craft' Cannabis To Take Root In Canada Anytime Soon

Big growers — and their associated brands — will likely be your first or only choice "next summer" or whenever recreational cannabis becomes a real thing.

02/06/2018 14:22 EST | Updated 02/07/2018 11:41 EST

Late last year, I wrote five things to know about Canada's emerging cannabis sector.

The No. 1 item was a consolidation of major players.

Now, just a month into the year, the announcements are coming fast and furious.

Blair Gable / Reuters

In mid-January, giant Aphria bought much smaller Broken Coast — a Vancouver Island-based grower. This after Aphria's December investment in helping create the DOJA/Tokyo Smoke deal — which closed last week.

Then, after an unsuccessful hostile take-over bid last year, Aurora finally played nice, offered more money and acquired CanniMed. In the deal, an acquisition in the works between CanniMed and Newstrike fell through — landing Newstrike, and probably some of the members of the Tragically Hip, with a handsome "break fee" payday totalling $9.5 million.

There are more rumblings about future acquisitions, hostile and otherwise, in the news each day. At the same time, there are more than 400 new applicants waiting for Health Canada approval to begin their cultivation and eventual sale of cannabis, medicinal and recreational.

So, what does this all mean?

As the industry develops, it is going to be the big guys who have paved (and paid) the way, first.

The big players — those with increasing growing capacity across the country — are well-positioned to supply the recreational market and keep hold of some of their patient base that they have cultivated.

For the smaller players, it will be a tall task to keep product flowing to the recreational market. Think about the LCBO in Ontario — they will be the distribution and sale regime for Ontario's legalized cannabis. They are a notoriously difficult — and unprofitable — place through which to distribute for brewers and vintners. Will it be any easier or profitable for a two-year-old cannabis company just hitting its stride with growing at scale? Unlikely.

For the consumer, it will mean that the big growers — and their associated brands — will likely be your first or only choice "next summer" or whenever recreational cannabis becomes a real thing. Kind of like AB InBev having an array of brands — but all brewed by a huge company. More to the point, Constellation Brands owns a large stake in Canopy Growth — the world's largest cannabis company.

The parallels are uncanny.

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The large growers will supply the large distributors — like the LCBO. If you are looking for craft cannabis, your best bet may be B.C., where smaller dispensaries and retail options will be part of the recently announced regulatory regime.

But give it time.

As the industry develops, it is going to be the big guys who have paved (and paid) the way, first. They were first to comply with Health Canada regulations and to accept the risk of launching their businesses in uncertain times. As the industry and regulatory landscapes develop, even smaller and more numerous growers may enter the space.

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Already, Health Canada's regulatory hurdles are easing — not by major leaps and bounds — but by increments that will allow smaller craft growers to enter the space with less cash and more of a lens toward catering to smaller segments of the market.

In the meantime, if you are looking for craft cannabis growers, you might have to wait a bit for them to catch up with the big boys. Or wait for the big boys to buy up or invest in your favourite small grower — like Aphria just did with Broken Coast.

Stay tuned — if there's one thing that is for sure in this ever changing space, it is that there will be more consolidation to come.

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