There are hundreds of different cannabis investment opportunities across North America, ranging from cultivators to dispensaries to ancillary service providers. With the growing competition, it’s important for investors to understand the factors that influence whether early-stage cannabis companies will succeed. Production capacity may have been the most important factor in the past, but branding and product formats are becoming more important.
In this article, we will take a look at these two factors driving the value of multistate operators and how Ionic Brands (CSE: IONC, FRA: IB3) is addressing both of them.
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The $146.4 billion global cannabis industry is in the midst of a massive shakeup, as traditional flower surrenders market share to concentrates and edibles. The fastest growing concentrates category is marijuana vape products, which are experiencing the same growth trajectory as e-cigarettes in the tobacco industry. Consumers are demanding more discreet and sophisticated ways to consume cannabis products.
New brands are launched every day—especially in the vape category—but the industry remains fragmented. Multi-state operators are trying to close the gap by introducing consistent, national brands that span several states. In addition to helping consumers select products, the companies behind these brands are capturing early market share on a national level, protecting long-term profit margins, and creating sustainable competitive advantages.
Many MSOs have focused on building strong brands in the Western United States where recreational cannabis has already been widely legalized across several states. For example, Washington State, Oregon, and California have all legalized recreational cannabis, while Nevada, Colorado, and Arizona are natural markets for expansion in the future.
Focusing on Concentrates, Not Flower
The cannabis industry may have begun with cannabis flower, but there’s no doubt that concentrates will become the industry mainstay. Concentrates have already become the fastest growing segment of the legal cannabis industry and continue to capture shelf space and market share from cannabis flower products across many states. In fact, concentrates have captured 26.6 percent of the market, gaining dollar sales faster than any other product. ArcView and BDS Analytics estimate that concentrates will reach $8 billion in sales by 2022.
Within the concentrates category, vape oil continues to lead the market in growth versus live resin, oils, wax, shatter, and other concentrate products. The market for vape products surpassed $5.5 billion last year, according to Wells Fargo analysts, representing a robust 15% compound annual growth rate across tobacco and cannabis. In 2017, ArcView and BDS Analytics found that vape cartridges accounted for over half of concentrate sales, and those figures could rise to 80 percent of sales by 2022—or a $6.5 billion market opportunity.
Altria Group’s (NYSE: MO) $12.8 billion investment in JUUL, resulting in a lofty $38 billion valuation, underscores the growth opportunity. In the cannabis industry, many companies are attempting to position themselves as leading providers of vape oils. Premium vape pens and differentiated vape oils that capture early market share could enjoy lasting advantages.
Innovative cannabis companies are also looking beyond vape pens and oils to other forms of high-growth concentrates. For example, edibles are quickly becoming a mainstay of the industry. Cannabis-infused chocolates, beverages, and other product categories could replace candies and beers as recreational options for consumers.
Ionic Brands recently entered into the highly desirable edibles market. It is estimated that edibles spending in US and Canada topped $1 Billion in 2017 with a forecast to grow to more than $4.1 Billion by 2022. The Zoots acquisition provides the company with unique exposure to the edibles space and plays into the Company’s cannabis concentrates expertise as one of the largest volume extractors in Washington State.
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