Canopy (TSX: WEED) aims its focus for its future on establishing a premium brand-name product that can command a reflecting price in the post-July market in Canada. Canopy faces stiff competition from its peers like Aurora Cannabis (TSX: ACB) and Aphria Inc (TSX: APH), both of these organizations run incredibly efficient operations and are led by a studious management team. All of which sounds promising. In the case of Aphria, they are also conscious of brand power and have strategically aligned themselves with Tokyo Smoke to create a diversified portfolio for the future recreational market. Canopy, however, is focused on building a brand name for itself with the hopes of capturing the average recreational user next year.
Can branding make Canopy the top producer in Canada?
Canopy’s CEO – Bruce Linton, whom we love and respect, believe that brands will be the differentiating factors when the recreational market rolls out. This is all assuming their audience is willing to pay a premium for the brand. Canopy already owns strong brands in the space, including Tweed, Bedrocan, and Mettrum, all of which are working hard to establish their own brand identity.
On the one hand, consumers will have a cheaper, generic brand of cannabis inside of a generic container, without any identity. On the other, you’ve got a product packaged in uniquely-branded containers thats also endorsed by celebrity cannabis-pioneers like Snoop Dogg. Consumers have in the past, and will continue to – pay a premium for celebrity-endorsed and branded products.
Canopy is also strategic in their aim towards a millennial audience (according to Colorado stats, this is the largest demographic for the recreational market) – having endorsed and sponsored numerous music festivals and arts events throughout Canadian universities.
Is branding alone a durable competitive edge?
In essence, yes – brands matter. In the rival cigarette industry, Marlboro and Camel ads are plastered across magazine pages, and the numbers suggest that the average smoker is willing to pay the premium to smoke a well-known brand.
Canopy, I believe, can be the Marlboro of the cannabis game, and if thats the case, Canopy will enjoy superior margins as the recreational market rolls out.
The limitations on branding initiatives in Canada
The Ontario government recently announced that the LCBO (Liqour Control Board of Ontario) will be opening up to 150 stores in Ontario by 2020. That means the currently-operating grey-market dispensaries will be a thing of the past as Ontario has committed to shutting them down in favour of the LCBO retail model, including taking control of how cannabis will be advertised.
The Federal Gov has previously denounced celebrity-endorsed cannabis marketing, and if all provinces adopt an Ontario-esque model, well then Canopy’s brands will have less of an impact. Bruce Linton believes that legalized cannabis sales may shift gradually towards premium stores over time. Such stores can include branding and advertising, therefore allowing Canopy to leverage this in their marketing efforts.
For the investor, this presents an interesting dilemma – invest in companies prioritizing economic efficiencies such as lower-cost production, or producers aiming towards a premium brand?
At the end of the day, nobody ever asked about the filtration process of the Vodka inside of a Grey Goose bottle.