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Saturday, Apr 20, 2024
Mugglehead Magazine
Alternative investment news based in Vancouver, B.C.


Are Cannabis Companies Making a Mistake by Expanding Into Europe?

As marijuana legalization has progressed in many parts of the world, cannabis companies have been working feverishly to expand and gain first-mover advantages in many emerging markets, could expanding into Europe this early be a mistake?

Close view of one euro coins with a hemp seeds

As marijuana legalization has progressed in many parts of the world, cannabis companies have been working feverishly to expand and gain first-mover advantages in many emerging markets. However, given the challenges that persist in the Canadian and U.S. markets, there’s been more than enough for companies to keep busy with in their home quarters. Especially with cannabis companies struggling to stay out of the red amid rising expenses relating to aggressive growth strategies, it may seem suboptimal to spend time securing positions in markets that could be much further away.

Growth Potential for the CBD Market in Europe Is Still Limited

According to a report from the Brightfield Group, the market for cannabidioil (CBD) in Europe was just $318 million in 2018. And although there is significant growth expected, at 400% by 2023, that would total just $1.6 billion. And that would still take four years from those numbers being realized. To help put this into perspective, consider that Nevada has been averaging monthly sales of $50 million. At that run rate, that would equate to a market size of around $600 million for just one U.S. State. Now consider that there are only 10 States that have legalized marijuana for recreational use and there’s a lot more potential in the U.S. market today than there will be in the European CBD market years from now.

While it’s definitely alluring to get involved in a part of the world where there are fewer competitors, it’s a much longer-term plan.

CBD is just starting to take hold in Europe, with both product availability and consumer awareness still quite limited. This is a great opportunity for developed brands to enter and expand through Europe with far less competition than we’re seeing in the U.S.

However, that hasn’t stopped companies from looking to expand as quickly as possible into as many markets as possible. Just look at cannabis giant Aurora Cannabis Inc (TSX:ACB)(NYSE:ACB), which sees international expansion as a big part of its overall strategy. Under its own corporate profile, Aurora has put the following on its website:

With the increasing adoption of medical and adult-consumer use cannabis legalization globally, Aurora has embarked on an aggressive international expansion strategy which currently sees the Company with sales and operations in 24 countries around the world.

That sounds impressive, at least until you look at Aurora’s financials and see much bigger issues at hand.

In the six months ending December 31, 2018, Aurora incurred operating expenses of more than $232 million, up from just $33 million in the prior year. Its gross sales before excise during this time were a little under $92 million. The bulk of the increase in the company’s expenses came from general and administrative, which rose by nearly $70 million and were likely to do with all the growth that The Company has been undertaking.

Investors Shouldn’t Get Duped by Promises of Growth

It’s a dangerous game that’s being played by Aurora and other big players in the industry. Expanding into Europe and other parts of the world is a very long-term play that will take years before we see it amounting to anything material. But in the meantime, companies can talk about population size and market potential to help generate hype around what they’re doing.

However, when you consider the supply issues plaguing the industry in Canada and the lack of profitability on its financials, it seems almost reckless to be so aggressive in expanding. Normally, you’d see a business succeed within its own borders and then look to expand into other parts of the world. Unfortunately, some cannabis companies are taking the opposite approach.

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