Johnnie Walker and Jack Daniels…Budweiser and Skinny Girl…Maui Wowie and OG Kush? With legalization of recreational marijuana on the horizon, what can Canadian cannabis growers learn from established consumer goods producers about succeeding in the retail market?
As the federal government moves closer to legalizing marijuana for recreational use – current estimates point to legislative assent by early 2018 – the game is changing for Canadian marijuana producers. The country’s marijuana market, which will generate an estimated $125 million next year, could exceed $2.5 billion by 2020 once legalization comes into effect, Toronto-based Mackie Research Capital Corp. forecasts.
The medical marijuana market has already attracted more than 30 licensed producers (LPs) that are investing in state-of-the-art facilities to meet strict regulatory guidelines and shrink the costs of growing and harvesting. This trend has made affordable cannabis more widely available to Canadian patients – and contributed to the rise of grey-market dispensaries across the country.
Once it becomes legal to spark up a joint or nibble on a marijuana brownie for pleasure, a new and unique market dynamic will emerge. The creation of a new product category that already enjoys significant mainstream demand has few parallels in the history of modern capitalism. Existing LPs have a head start, but will need to build a whole new set of capabilities to capitalize on.
Premium brands for premium profits
Marijuana production is already moving away from grow ops, remote forests and cross- border imports and toward industrialized agriculture. As more producers and investors enter the market, the unintended consequence could be rapid commoditization.
Although we’re still one or two years away from a recreational market, investor and consumer attention will only increase the number of producers looking to enter the market. Low-cost and/or high-quality production are key drivers of competitive advantage, but anyone hoping to maximize margins will need to build premium brands with recreational customers across the country.
The experience of U.S. producers provides limited insight for Canadian competitors. To date, seven American states and Washington, D.C., have legalized recreational marijuana use. Regulation around advertising is restrictive, and Canada will probably follow suit. Distribution in the U.S. is highly fragmented, with bricks and mortar channels constrained to individual and franchised specialty stores. This allows producers to leverage multiple points of sale, but makes it tough to crack the mass market. Conversely, Canadian producers may have the opportunity to build the marijuana
equivalents of Jack Daniels and Coors Light, positioning themselves for long term market leadership.
The channel challenge
No one knows for sure how the Canadian distribution market will be structured, but it’s safe to say that the concentrated and regulated liquor retail model will likely play a major role. Despite concerns about selling alcohol and marijuana side by side, governments and labour unions in Ontario, Manitoba and Nova Scotia, as well as unions in Quebec and B.C., have expressed interest in using existing Crown and public liquor distribution channels for the sale of recreational marijuana.
Operating in a monopoly retail market can be complicated. Although it creates opportunities for mass exposure, having the best and/or cheapest product isn’t enough to build a sustainable competitive advantage. Once legalization is in place, first movers in the market will have to learn quickly how to compete in a new arena. Current and prospective marijuana producers must start to think and operate like large-scale beverage and consumer packaged goods companies to get the most out of their available channels. Here are a few key considerations:
Market segmentation: Thanks to the illicit nature of the marijuana market, structured market segmentation has never really occurred. Like in any other market, customers are as varied as the strains of sativa they buy. Young professionals, suburban moms, aging baby boomers nostalgic for the 1960s, and many other expected and unexpected segments are likely to emerge, each with unique sets of decision drivers and buying influences.
As with any other market, producers must understand the various groups and decide where to focus. Once LPs choose their playground, they can start to make key decisions about their brand and the customer experience they want to provide.
Brand building: Creating demand pull through consistent brand perception and customer experience will be crucial to success in what we believe will be a cutthroat market. Current LPs can get the jump on establishing a value proposition that appeals to their target customer segments. With that in mind, leaders may want to consider creating large parent brands that house targeted sub-branded products. Each brand will need the right blend of print, online and mobile presence to speak to target customers when and how they want to be engaged.
Retail channel relationships: Walk into any provincial liquor store and you’ll see top brands competing with emerging craft players for shelf space and eyeballs. A well-run retail relationship management program ensures that a product is pushed out to the market profitably, and in ways consistent with its branding. The U.S. Federal Trade
Commission estimates that large alcohol producers devote upward of 25% of their marketing budgets to retailer and wholesaler promotions, though there is increasing pressure to optimize spend by focusing on target channels and customers.
Companies seeking to become the marijuana equivalent will need to invest wisely to seize the opportunities presented by the LCBOs and BC Liquor Stores of the world. This means becoming adept at managing current systems and processes to secure premium shelf space and get the most out of in-store promotions, and to build sticky customer relationships through in-store loyalty programs like Air Miles.
Products, pricing and partnerships: While managing retail relationships, LPs will need to leverage all available data to entrench their brand. Beginning with the product mix decisions (i.e flowers, edibles, pre-rolled joints, etc.), they need to make sure they provide a consistent product experience. A bottle of Bud tastes the same in Halifax as it does in Victoria, so why should an eighth of Blue God Bud be any different?
They also need to select the product features and packaging – think Crown Royal’s iconic purple bag – that appeal to the target segments and offer their products in stores frequented by them. Understanding the monopolies’ channel footprint is paramount in offering the right products at the right locations. Furthermore, the LPs should start thinking about forging partnerships with complementary brands and with strategic influencers who will capture the attention of target customers.
Last but not least, LPs need to understand the pricing strategy of the retailers to be able to set the optimal trade pricing that will in turn influence the retail price. Setting trade pricing too high or too low may mean leaving money on the table for the LPs or ceding market share to other emerging competitors.
Getting a fast start
The monopoly liquor model may be the primary vehicle for retail marijuana in Canada, or it could just be the starting point. Loblaw Cos. has publicly stated its desire to get into the medical cannabis business through its Shoppers Drug Mart locations and grocery- store pharmacies, and it’s not hard to imagine a world where packs of joints and cannabis candies occupy shelves alongside cigarettes and chewing tobacco.
In any event, recreational marijuana is coming, and it will make a lot of people rich. LPs and their investors shouldn’t wait for the market to open before setting and implementing their retail strategy. They need to start thinking today about how to translate the head start afforded by their production expertise and access to medical markets into recognizable and sustainable brands. When consumers go to the store to buy marijuana for the first time, the Molson Canadian of pot should be the first thing they see.