Defining success in the cannabis sector. Highlights from the spring EY Cannabis Forum

Transcription

1 Defining success in the cannabis sector Highlights from the spring EY Cannabis Forum

2 Highlights from the spring EY Cannabis Forum

3 We recently brought together some of Canada s leading cannabis sector participants at the EY Cannabis Spring Forum in Toronto. Attendees discussed a wide range of topics relevant to entrants into this new and untested industry, and how Canada has a unique opportunity to become a world leader as we define what until now has been an undefined market. The following are the highlights from each session. Defining success in the cannabis sector 2

4 Establish your brand, generate success Grace Lee, EY s Customer Strategy Leader, sat down with Alan Gertner, CEO of Hiku, as he shared his thoughts on the importance of brand to Canadian cannabis companies. As Canadians prepare for the nationwide legalization of cannabis, licensed producers (LPs) are gearing up to compete for the attention of consumers the large majority of whom will be new to the product. In the early stages, LPs will need to build robust brands to differentiate themselves in this new market. On day one, it s estimated that approximately threequarters of customers who will be lining up to purchase cannabis products will have had no experience using it. This means they ll have little to no idea what they re looking for in a product. Whether consumers are going to be seeking products for recreational or medical use, they re going to need to be educated about the products before they try them. And while Canada has an established alcohol culture, cannabis use tends to be different. Users don t necessarily have it on the same types of occasions as they drink, such as a cocktail in the evening or a glass of wine with dinner. Often people will consume cannabis first thing in the morning. A lot of people don t know that and need to understand it. Gertner also said that cannabis brands should not be built around the leaf itself. Brands should be able to scale and tell a story around the lifestyle. To that end, LPs will want to market different products to different customer segments. While cannabis is still controversial, if producers build a footprint, test and learn from their mistakes along the way, they ll become agile and move more quickly to beat competitors that will be entering the market. 3 Defining success in the cannabis sector

5 Panel discussion Monica Chadha, EY s National Cannabis Leader, moderated this discussion among some of the sector s leading executives about opportunities, challenges and uncertainties they face as the nation prepares for legalization. On strategy It s important to be flexible, but you have to be able to scale your strategy. If you re reactionary, you ll always be a few steps behind. Create operating leverage, partnerships and other structures; find local distributors rather than build your own network. Be proactive, think about what s next, and look at what s happening around the world. Think about how to create new categories that people aren t thinking about today. You might invest in several different options and only one might pan out. We re building startups, but we re also building an industry that didn t exist even four years ago. So we re all figuring out what the strategy is for growing the industry overall. Focus on who your customer is and how you re going to build relationships. It s important to know your competitive advantages and focus on establishing the brand and long-term customer relationships. On maintaining top-tier status within the industry The flower itself is a disruptive ingredient. Other products such as infused beverages, oils, topical products and so forth don t look anything like the flower. Your brand is not just a name, it s the trust in that name and the experience. It depends on what you want to be in what market segment do you want to be a top player? What metrics will you use to determine what it means to be a top-tier player? Focus on developing your intellectual property (IP), your brand and low-cost production. Set your own internal goals. For us it s about making sure we excel in a few areas, not just having a few press releases for name recognition. It s hard to say how you re going to build a strong brand with the heavy marketing restrictions. Brand is how categories evolve and industries evolve. We re focusing on building an iconic Canadian brand, something all Canadians can relate to. Defining success in the cannabis sector 4

6 On scalability and managing risk The fact our businesses are scaling at breakneck speed adds to the risk. We sell our products for generally higher prices than most other producers, so we don t want to risk tarnishing our brand by pushing sales at the expense of our reputation. It s a very challenging sector to navigate. The biggest risk is time. If you try to be all things to all people, you end up being nothing. Focus on a few things you can do really well and work with others who can do things you can t do, and you can avoid the pitfall of time. As an industry, we re building the sector together. A focus on short-term sales vs. long-term potential is a threat to everyone. There s a risk of companies overpromising. It s a balancing act you need to have a realistic balance of what you can commit to. As a CFO, I lie awake worrying about execution. If you don t have the right talent and the right depth of talent, things are going to go off the rails. But if you can do that successfully, you should be OK. On establishing a sustainable brand It s about communicating a solid brand message to Canadians. We have smart people who act as a focus group on our initiatives. This partnership has proven to have a lot more than simply a celebrity endorsement to it. For us it s really two parts the substance of your business and how we get the message out. We re not just building awareness, the product quality has to be there. If you control messaging and have a good product, you re OK. Education is really key people need to understand how to properly and responsibly consume the products. There needs to be a high level of [product] quality at the outset so as not to disappoint and discourage consumers. Think about it: if their first experience is not solid or if there s a lack of consistency with the same brand between different purchasing locations, that s going to hurt the industry as a whole. On customer conversion If someone has never tried it, they usually tend to enjoy their first time. So there s going to be a high net new adoption rate. For existing users, though, it will be hard to change their purchasing habits. I think you re going to see waves coming, with a big rush at first. We ll have a better idea by 2020 when there are more products available that are currently only available on the black market. Cannabis doesn t involve the sugar and hangover that alcohol does, which might encourage people to switch. The variables are going to be the price and product assortment. In the first year we re not going to have all the products people want, and we ll have a hard time bringing everyone over from the black market. If the price is right and the products they currently use are available, I think they ll come over. Two or three years out we ll be in a good place; we don t need to convert the unconverted. On major disruptors to the sector I think the major disruptor will be IP development, whether in medical or recreational or both. We re dealing with a plant that s not largely well understood from a scientific point of view. There are so many different ailments that various varieties of cannabis seem to help. As science catches up with consumer use, it will spur more users and more doctors into the market. The medical side is one that people tend to overlook. You don t cure pain, you treat it. And then there s the opioid epidemic it needs to end, and cannabis could be a good substitute. So on that front it could be a huge catalyst for growth. As research comes out to support those kinds of findings, I think people are going to be upset that it hasn t been legal for the last 80 or 90 years where have you been all my life? There s a strong potential for counterfeit products in the market. We re all working on expensive IP and security to protect it. We ve established a secure supply chain to ensure quality products. That will help us fight the black and grey markets. 5 Defining success in the cannabis sector

7 Today s governance, tomorrow s success Deborah Rosati, a board member at MedReleaf and founder and CEO of Women Get on Board, shared her thoughts on the challenges and opportunities facing directors in this emerging industry. Cannabis is definitely an emerging industry. At the end of the day, governance is about putting processes in place to make sound corporate decisions. It s about putting the right people in the boardroom. Because it s a new industry, there will be directors who come from related sectors like pharma, technology, agriculture and retail, who can bring their experience to this new and untested industry. Many cannabis boards are also seeing an increase in female representation. Directors need to be diverse in thought and experience, and they need to bring different skillsets to the table. It s particularly challenging when companies are early stage. For example, they ll need directors who bring public company experience when the company goes public. These companies need entrepreneurial directors, people you can trust, who have integrity. Small boards need to be agile. But even with agility, not every decision should be made quickly. If a board member, or the whole board, does not fully understand an issue, they shouldn t make a decision right away. Bringing in advisors to provide additional information and context should be an important tool in any board s toolkit. Business partners are widely available in this wild wild west of an industry, so it s doubly important to do your due diligence on those you plan to work with. Reputation is everything. Developing a framework for risk and governance and having proper processes in place to support decision-making is important, especially for such a highly regulated industry. Governance is not something to be scared of, it s something to embrace. Defining success in the cannabis sector 6

8 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. For more information about our organization, please visit ey.com/ca Ernst & Young LLP. All Rights Reserved. A member firm of Ernst & Young Global Limited ED None This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication. ey.com/ca Contact us Monica Chadha National Cannabis Leader, Central Canada monica.chadha@ca.ey.com James Chan Risk and Corporate Governance james.chan@ca.ey.com Helen Goloubtchik IT Risk Management helen.goloubtchik@ca.ey.com Ashley Chiu Cannabis Risk and Strategy ashley.chiu@ca.ey.com