Cannabis Corner: No More Commodity Models

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

Aurora Cannabis Corp. (NYSE:ACB) remains a drag on sentiment throughout the cannabis industry after reporting a $1 billion loss. While this is not the closing bell for the company, it is a wake-up call.

The commodity sales model is simply broken. Too many opportunistic growers have flooded the market with low-quality plant product and gotten Canadian consumers habituated to the cheapest buzz possible.

That’s a bad business because until the giants can consolidate enough of the small suppliers and enforce discipline, everyone is in a race to the bottom. And that’s where ACB and its peers are now.

These companies need to entice consumers with higher-end merchandise and price points to match. People have talked for years about recombinant strains and tailored edible products. They just haven’t gotten any traction.

Part of the problem is that Canada was slow in approving sales of anything beyond basic “Cannabis 1.0” plant material and extracts. There just wasn’t an outlet for innovation or added value.

And in the meantime, consumers got used to fixed prices. Maybe they weren’t euphoric about the experience, but it was legal and met their needs.

Unfortunately, ACB says Cannabis 2.0 buying patterns are volatile. Consumer tastes are fickle. There’s no breakout hit yet, and until someone finds the lucky formula, new product development will be expensive.

Someone will find that formula. Until then, it looks like the 1.0 market has matured. ACB is one of the top players in the industry and its revenue growth has stalled.

When the giants stall, smaller competitors can seize market momentum with differentiated products that stand out from the status quo.

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I’m watching those companies as the key to the next wave of investable cannabis stocks. But unless ACB or one of its big rivals step up fast, I’m writing them off for the time being.

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