The Canadian cannabis industry needs help. Although retail sales have been growing amid the pandemic, many cannabis companies have been struggling to generate meaningful growth. A big part of the problem stems back to marketing, as it can be challenging for a consumer to discern one brand from another when inside of a pot shop given the significant restrictions that are currently in place.
However, there is a review coming up for the cannabis industry as it approaches its three-year anniversary this October. And OrganiGram Holdings (NASDAQ:OGI) CEO Greg Engel is hopeful that the federal government will make changes that will help it and other marijuana producers take advantage of the brands that they have built up thus far.
Why the Canadian pot market needs changes
It’s clear by looking at OrganiGram’s financial statements that something is amiss in the Canadian pot sector. Although the company said in its most recent earnings release (April 13) that it faced challenges due to COVID-19, sales fell at a time when they should have been rising. For the period ending Feb. 28, OrganiGram’s net revenue of 14.6 million Canadian dollars declined 37% year over year.
That is a concern given that retail cannabis sales in Canada during that three-month period totaled CA$839.9 million — 86% more than the CA$452.8 million that was reported a year ago. Even pot giant Aphria didn’t generate a ton of growth during the same period, as its net revenue of CA$153.6 million was just 6% higher than the previous year.
With the industry getting bigger and more producers getting involved, it becomes harder for companies to stand out. That could explain why a company like Auxly was able to achieve the top spot for cannabis 2.0 sales (which includes edibles, beverages, and vape products) last year, ahead of Canopy Growth and Tilray, two companies that partnered with big-name beverage producers — Constellation Brands and Budweiser.
Canopy Growth also has a growing list of celebrities who have been associated with it, including Martha Stewart, Seth Rogen, and Drake. But it can’t use that star power on its products or advertising as the government prohibits testimonials or endorsements on packaging.
OrganiGram can’t even take advantage of its partnership with Constellation Brands. Under the Cannabis Act in Canada, it isn’t possible to promote cannabis “if there are reasonable grounds to believe that the promotion could associate the cannabis, the cannabis accessory or the service with an alcoholic beverage.” There’s a similar rule relating to tobacco, which means that even though British American Tobacco acquired a 19.9% stake in OrganiGram earlier this year, the pot producer can’t leverage that in any promotions, either.
What changes should investors look for?
In a recent interview with Bloomberg, Engel said he just wants a way to communicate to customers how OrganiGram’s products are different from others in the marketplace.
One example he pointed to was RE:MIX, a dissolvable cannabis powder the company launched in November 2020. The powder can make any drink a cannabis-infused beverage. And according to the company’s own survey, it found that roughly three-quarters of consumers prefer to add cannabis to a drink themselves rather than purchase one that already contains it. But without a way to effectively communicate relevant product information on packaging, it can be a challenge for consumers to know whether it meets their needs.
Branding has long been a sore spot for the cannabis industry in Canada because it is highly restrictive, so any progress on that front would be a welcome change for licensed producers. Whether it is allowing more messaging or some form of marketing on a package, any change in this area would likely be a positive one for cannabis companies.
The takeaway for investors
There is no guarantee that a change is coming for the cannabis market in Canada. But investors will want to pay attention in October when the industry hits its three-year mark to see if the Cannabis Act gets an update. Given the impact of COVID-19 and the need to help get people back to work, there may be some extra incentive to help the cannabis industry grow even more than it already has over the past year. Changes in branding and marketing would certainly go a long way in doing that, as they could help established companies like OrganiGram and Canopy Growth grow their brands.
But with nothing on the docket right now, investors will need to take a wait-and-see approach. If there are no changes, cannabis investors may be better off buying shares of U.S.-based pot stocks instead, which are posting much stronger sales numbers.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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