Restrictions On Packaging & Branding Could Hamper Canadian Cannabis Producer Canopy Growth’s Sales

by Trefis Team
Rate   |   votes   |   Share

Cannabis companies in Canada are actively preparing to meet the anticipated rise in the demand for cannabis products post October, when the country will legalize adult-use of marijuana for recreational purposes. On the one hand, these companies are ramping up their processing capacity, and on the other hand, spending ample resources to design their marketing strategy to stay ahead in the upcoming recreational marijuana market. However, these companies have to be extra cautious in branding their products, since Health Canada – the department responsible for public health policies – has laid down stringent rules and regulations for the packaging and branding of recreational cannabis products. Non-compliance with these regulations might lead the cannabis companies into legal issues, which could hamper their growth. Here, we discuss some of these restrictive regulations and how they could hamper the sales and valuation of Canada’s largest cannabis producer, Canopy Growth (TSE:WEED) (NYSE:CGC).

Our current price estimate for Canopy Growth is CAD 53 per share, which could go down to CAD 41 per share due to the restrictive packaging and branding policies. You can view our estimates on Canopy Growth’s interactive dashboard and create your own scenarios to suit your assumptions.

Rules Governing Recreational Cannabis Market

The primary intent of legalizing recreational marijuana is to eliminate its illegal sale rather than to promote its commercial use. Accordingly, Health Canada has enlisted a number of rules for the branding and packaging of recreational cannabis products. These rules require the products to have a single uniform color, a standardized font style, and no images or graphics other than the logo on them. In addition, the packaging should not indicate the price, quality, performance, or effects of the products. Moreover, the licensed producers are prohibited from using celebrity endorsements, or endorsements from fictional characters that promote a particular way of life, or in any manner, link it to glamour, excitement, or risk.

Furthermore, the products need to have a health warning printed on them on a bright yellow background. This restriction has been highly criticized by the pot producers in the country, as it is pushing the rules of the cannabis industry closer to those governing the tobacco industry. In order to avoid the tough fate of cigarette companies, such as Altria (NYSE:MO) and Philip Morris (NYSE:PM), who have struggled with regulatory issues, cannabis producers have asked for more relaxed rules, similar to those that govern the alcohol industry.

Impact On Canopy Growth

The purpose of these restrictions is to protect the people of Canada from uneducated use of marijuana and eradicate the black market for cannabis products. However, excessive restrictions could not only defeat these objectives, but also hamper the upside potential for cannabis producers, such as Canopy Growth.  Here’s how:

Firstly, the cannabis products available in the black market are beautifully packaged in order to attract users. If the legally available products have a monochrome packaging, there are chances that the youngsters will continue to prefer the attractive looking illicit products over the boring looking legal ones. This would lead to loss of business (or incremental sales) for Canopy, cutting short its upside potential from the recreational cannabis market.

Secondly, the manufacturers are prohibited from differentiating their products in terms of price, appearance, or quality. Since Canopy has been in the cannabis industry for a while, its products stand out due to their superior quality and reliability. But with these new regulations, the company may not be able to differentiate its products due to similar appearances and may end up losing customers to its competitors.

Finally, the ban on celebrity endorsements could prove to be a big hindrance for Canopy, given its strong business association with rapper Snoop Dogg. The famous celebrity had partnered with Tweed through his venture capital firm, Casa Verde, a few years ago. Later on, Tweed was acquired by Canopy, and the rapper continued to be a investor in the company. Now, Snoop Dogg plans to enter the Canadian cannabis market with his company, Leafs by Snoop. Consequently, he has chosen Canopy Growth, which is the largest medical cannabis producer in Canada, to have the exclusive rights to his company.

Not only will Canopy own Leafs by Snoop and produce its signature strains, it will be closely associated with Snoop Dogg, a weed connoisseur. While it would have been a great marketing strategy to use Snoop Dogg as the brand ambassador for its products, the restrictive policies of the government will force Canopy to keep a low profile and refrain from using the rapper from promoting its products, lest it would end up in a legal tussle with the regulators. On the contrary, Canopy will have to look for more creative and cost-effective ways to differentiate its products and make the most of this opportunity.

 

Do not agree with our forecast? Create your own price forecast for Canopy Growth by changing the base inputs (blue dots) on our interactive dashboard.

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs

Like our charts? Explore example interactive dashboards and create your own.

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!