House brands may not be profitable now, but in the future they absolutely will be. Of course, there are a number of factors that will determine their success.
Establishing a house brand as a retailer in the cannabis industry is a positive step. Over the last three years since legalization, one of the significant issues faced by consumers is having consistent availability of their product of choice. While several different products are always available, consistency in getting one product that maintains its quality has been difficult. This no doubt is due to the industry growing very rapidly while it is still determining how to position its products.
A house brand makes sense in the long run as it gives the retailer an opportunity to continually offer a quality product that consumers know will be available. In addition, brand differentiation is crucial for retailers given there were 3,333 stores across Canada at the end of June.
However, in the immediate term there are a number of issues and challenges that have to be understood and addressed:
1. It is no secret that the Canadian marketplace is awash in various cannabis products. Consumers have a wide choice of product categories (e.g., oils, tinctures, beverages, edibles and topicals), with various levels of THC /CBD that are produced by a large number of companies.
2. Establishing a brand in any business/industry is not an easy task and making that brand profitable can take several years. Regardless of a positive environment, nothing rarely, if ever, happens overnight. The cannabis industry, even during the early days of easy investment, is no exception. The industry is crowded from an oversupply of producers, products, and retailers, so achieving profitability is a long and complex dance between market dynamics and the various regulations that allow the market to exist.
3. Retail itself is a challenging enough business environment (even without a global pandemic having a significant impact on sales) and making a profit in this space adds an additional level of complexity. The high tax rates and mark-ups established by the regulators and government distributors already impose a significant burden on the industry, so profitability in the entire industry remains elusive in the short and medium term. While there are some companies that are reporting positive financials, they are the exception rather than the rule.
4. In Alberta there also appears to be an additional regulatory burden placed on a brand product in that the company that developed the branded product now has to go through an entire Cannabis Representative Registration, which places an additional cost on the company and requires significant information (e.g., security checks on key corporate personnel). This process is redundant given the licensed holder is the company that produces the product and is already responsible for the quality and safety of the product.
5. The existence of the illicit market still poses a robust challenge. While over time the impact of such a market will decrease, it still means there are products available that do not face the same level of costs associated with regulatory oversight and taxation.
Economic Contribution of the Industry
It is unfortunate that governments across the country have not consciously recognized that this industry is one that has provided positive economic growth. In their “2022 Report on the Cannabis Industry”, Deloitte calculated that Canada had: “A $43.5 billion boost to its GDP while directly and indirectly sustaining 151,000 jobs nationally.”
It is clear that the industry is growing and providing a positive economic contribution, but its development is hampered by various regulatory regimes which essentially treat the product as if it was as dangerous as plutonium. While there is still a lot of work to understand the risks and benefits associated with cannabis use, it is a product that should be regulated with a view that it is both a legitimate medical and adult use product, and that many of the fears associated with it at the beginning of legalization have not materialized.
Given this reality, the existence of house brands and their profitability will always be a difficult business proposition. Rules need to change while the market and industry need to mature. This is not a process that will happen in the short or medium term but will eventually be proven in the long run.