How will cannabis market leadership change?

QUESTION: What are the chances of market leadership in cannabis, currently held by Canopy Growth, changing now that bigger industries are investing in other LPs?

D.M. from Toronto, Ontario, Canada Canada

ANSWER: Cannabis in Canada is a highly regulated and controlled business by Federal legislation. Some provincial governments have created cannabis wholesale monopolies for their own financial benefit. Even so, the industry remains highly competitive. As you know we track the names and numbers of Licensed Producers and there are 134 of them at last count and over 40 of them are public or owned in whole or in part by a public company.

In my opinion, Canopy worked its way into a top position over time because of the leadership of Bruce Linton and the management team he assembled. For example, Linton was recently named Ottawa’s Chief Executive Officer of the Year. The performance of the company over the years is why I consider it a core holding in any portfolio.

Last week, we had another cross-industry investor into the Canadian cannabis industry when Altria invested approximately CAN $2.4 billion for a 45% interest in Cronos Group. Altria is the largest tobacco company in the world by sales and has a market cap of almost $100 billion. Constellation that invested in Canopy is an adult beverage company and is about one-third the size of Altria. This was a major “event” that I was looking for and unfortunately it was overshadowed by the hatchet-job on Aphria and Liberty Health.

I guess you are really asking is “Can Altria financially bully Cronos past Canopy to unseat them as the acknowledged cannabis industry leader?”

I think Canopy’s position at the top of the ladder is secure for a few years at least. Here is my thinking:

1. Canopy got to its current position through leadership and people power. Over a year ago, Canopy/Bruce Linton identified the international trend in cannabis before anyone else so they have a head start on their competitors. They have done this consistently for the four years plus they have been public.

2. Management attracts money. Constellation may be smaller but they invested about double the amount of money into Canopy that Altria invested into Cronos. So money is no longer a short term consideration for either Canadian company who have a spending power advantage over everyone else.

3. It’s possible moving forward that Cronos could make a significantly better strategic international investment than Canopy. It’s also possible that Canopy could stumble and lose their edge or one of the other large Canadian cannabis companies could possibly beat them both in worldwide expansion. It’s a competitive world out there so anything could happen. But I think the odds are against it.

4. If we look back from ten years into the future, it’s possible that Canopy is no longer the industry leader. That could happen for a variety of reasons but it won’t happen overnight and if it does, investors will be able to adjust their portfolios along the way. Look, twenty-five or thirty years ago, Kodak was the leader in photography and film. But they misread the digital revolution and now they’re left in the dust. As the saying goes, “Shift happens.”

In the next three to five years, I think Canopy is pretty secure in its perch at the top. If Linton is half as smart as I think he is, he would be the first to tell you that if you’re not moving forward, you’re moving backward. This can happen at any time to anybody so everyone will continue to work hard to get ahead or stay ahead.