The spread of legal marijuana has opened doors for entrepreneurs and investors, leading to a significant surge in the cannabis industry’s growth. In this year’s FT ranking of the 500 fastest-growing companies in the Americas, 11 cannabis companies have made the list. The compound annual growth rates of these companies range from 21% to 175% between 2018 to 2021, with two companies approaching the $1 billion mark in sales.
The Cannabis Industry’s Upside Potential
Missouri’s cannabis dispensaries are a testament to the cannabis industry’s upside potential. The state’s decision to approve permits to sell recreational marijuana earlier than planned has led to long queues outside dispensaries, and Missourians have spent almost $230mn on cannabis products since then. Missouri is projected to be the fastest state to reach $1bn in sales since it became the 21st state to legalize recreational weed following a referendum last year.
Cresco’s founder Charlie Bachtell highlights the $75bn industry “in the shadows” – the illicit marijuana market – that “we can convert . . . to come over to the regulated market in a pretty short period of time.” He believes that “all you need to do is match the quality, the availability, and the price of what [the illicit market] is currently doing.” Cresco’s revenues were $843mn last year.
Growth Opportunities in the Cannabis Industry
If states continue to legalize recreational cannabis at the current pace, analytics company New Frontier Data projects that the legal cannabis sector will more than double from $30bn in sales last year to $71bn by the end of the decade. Maryland is set to become the next US state to legalize recreational cannabis in July, and Oklahoma and Ohio are considering similar changes this year.
Kim Rivers, chief executive of Trulieve, which generated $1.2bn in sales from 181 dispensaries in 11 states last year, says that “growth in cannabis exists at every level.” The industry sees new consumers discovering the category for the first time, such as Gen Z’ers and middle-aged women. There is growth at the state level as new states come online, and the industry could see a massive change at the federal level over the next five to ten years.
Challenges Facing the Cannabis Industry
Despite the cannabis industry’s impressive growth, it is still hamstrung by numerous challenges. Pot is still illegal at a federal level, meaning all supply chains must stay within state lines, creating huge inefficiencies for big businesses. Furthermore, major US banks and financial institutions still do not have the legal certainty to provide much-needed financing for cannabis companies.
Most big companies, including Curaleaf and Trulieve, have struggled to become profitable, and their share prices are down compared with when they first listed on Canadian stock exchanges around the time that cannabis prohibition ended in 2018. In states such as California and Colorado, businesses have also had a “very difficult time” with a collapse in wholesale prices driven by “too much supply for the demand that was out there,” says Kyle Kazan, who runs California-based Glass House Group.
Investment Opportunities in the Cannabis Industry
According to Jonathan DeCourcey, an analyst at investment bank BTIG, the cannabis industry “still appeals as a high growth sector.” “While it could be choppy and it is difficult to invest in a space that will continue to be fairly unpredictable, until federal legalization arrives, there aren’t many industries with this much upside.”
However, the majority of big recent investments from consumer goods conglomerates in the cannabis industry have turned sour. Cigarette company Altria paid $1.8bn in 2019 for a 45% stake in Canadian cannabis producer Cronos, which has since lost more than 75% of its value. Last year, the Marlboro maker abandoned a warrant to acquire additional shares. Corona beer maker Constellation Brands also recently recorded a $1.1bn writedown on a 38% stake in cannabis company Canopy Growth, which it took in 2020.
Despite the challenges, there are several “fundamentally sound” cannabis businesses in the market. Cresco Labs, for instance, is currently merging with its competitor Columbia Care, creating new opportunities for growth and development in the industry. Bachtell believes that investors are searching for the “Cheerios of weed,” and while it may not be an easy task, he predicts that there will be plenty more reorganization and consolidation in the industry in the years to come.
Conclusion
The cannabis industry is experiencing exponential growth, with the legalization of recreational marijuana in more states leading to significant opportunities for entrepreneurs and investors. While the industry still faces challenges due to federal laws and financial restrictions, the potential for growth and development in the cannabis sector is vast. The emergence of fundamentally sound businesses and the increasing consumer interest in the category are promising signs for the future of the industry.
FAQs
- Is the cannabis industry a high-growth sector?
- Yes, according to industry analysts, the cannabis industry still appeals as a high-growth sector.
- How much is the legal cannabis sector projected to grow by the end of the decade?
- Analytics company New Frontier Data projects that the legal cannabis sector will more than double from $30bn in sales last year to $71bn by the end of the decade.
- What are the challenges facing the cannabis industry?
- The cannabis industry is still hamstrung by federal laws and financial restrictions. Most big companies have struggled to become profitable, and wholesale prices have collapsed in some states due to oversupply.
- How many cannabis companies made it to the FT ranking of the 500 fastest-growing companies in the Americas?
- 11 cannabis companies made it to this year’s FT ranking of the 500 fastest-growing companies in the Americas.
- What is the potential of the cannabis industry?
- The potential for growth and development in the cannabis industry is vast, with increasing consumer interest in the category and more states legalizing recreational marijuana.
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