Canada's recreational marijuana market and European medical cannabis markets tend to be the top subjects of discussion for executives of the biggest marijuana producers. That makes sense, with nearly all of the revenue for the big marijuana companies being generated in Canada and in Europe.
But what about the U.S., the biggest cannabis market in the world? The biggest of those big marijuana producers in terms of market cap -- Canopy Growth (CGC -1.08%), Aurora Cannabis (ACB), Tilray (TLRY), and Cronos Group (CRON -1.52%) -- can't enter the U.S. marijuana market and retain their listings on major stock exchanges as long as marijuana remains illegal at the federal level in the United States.
However, entering the U.S. hemp market is a different story altogether thanks to the legalization of hemp in the U.S. in December 2018. Which of the top Canadian marijuana growers is best poised to win in the U.S. market? Here's how the prospects look right now for Canopy, Aurora, Tilray, and Cronos.
Two of the top Canadian marijuana producers stand out as leaders in the race to jump into the U.S. market. Canopy Growth and Tilray have already taken significant steps to enter the United States.
Canopy Growth made its first big splash in October 2018 by acquiring Colorado-based hemp research company ebbu. Canopy was able to stay in compliance with the listing requirements of the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX) with the deal, even though hemp wasn't technically legal in the U.S. at the time. The company was able to do so by only conducting research and development with its ebbu operations and not producing any products for sale.
In January, Canopy Growth followed up with an even bigger announcement. The company revealed that it had secured a license to produce and process hemp in New York state. Canopy is investing between $100 million and $150 million to build a hemp industrial park in New York.
Canopy Growth founder and co-CEO Bruce Linton stated in his company's Q3 conference call in February that he expects the company will have hemp CBD products on the market in the U.S. by the end of this year. Linton also hinted at the possibility that Canopy could build hemp production facilities in additional U.S. states.
Tilray wasn't too far behind. In February, the company announced that it's acquiring Manitoba Harvest, the world's largest hemp food maker, for around $318 million. Manitoba Harvest's hemp-based food products are sold in over 16,000 stores in North America, around 13,000 of which are in the United States.
The acquisition of Manitoba Harvest plays into another deal Tilray made recently. The company announced in January that it was teaming up with U.S.-based Authentic Brands Group (ABG) to develop and market consumer cannabis products globally. Tilray CEO Brendan Kennedy confirmed in the company's quarterly update a few weeks ago that this partnership "will initially focus on CBD products in the United States." The acquisition of Manitoba Harvest gives Tilray a built-in supply chain for supplying CBD to ABG.
While Canopy Growth and Tilray appear to be the early leaders in entering the U.S., Aurora Cannabis and Cronos Group are the laggards. Neither company has announced any firm plans yet about its U.S. expansion strategies.
When asked about the U.S. hemp opportunity in the company's earnings call in February, Aurora Cannabis CEO Terry Booth replied that there is some confusion about hemp-based CBD distribution in the United States. He added that Aurora would "enter when it's proper to enter, and when it's legal to enter into the United States market."
To be fair, Aurora definitely has significant hemp capabilities. The company owns Agropro, the largest hemp producer in Europe. Aurora owns a majority interest in Canadian hemp producer Hempco Food and Fiber. And it acquired Uruguay-based hemp grower ICC Labs.
Cronos Group was the first Canadian marijuana stock to list on the Nasdaq. CEO Michael Gorenstein stated last year the Cronos planned to be "a big part of the U.S. market." So far, however, the company hasn't taken any visible steps to expand into the U.S. Gorenstein did say in Cronos Group's Q4 conference call, though, that Cronos has "done a great job of building strong relationships both with U.S. cannabis industry stakeholders" and will "continue watching very closely" the U.S. hemp opportunity.
Most likely to succeed
While there are distinct leaders and laggards among the top Canadian marijuana growers with respect to the U.S. market now, the dynamics could change quickly. It's quite possible that both Aurora and Cronos Group could make announcements in the near future about expanding into the U.S.
Aurora Chief Corporate Officer Cam Battley mentioned in the company's conference call that "we don't want to give away too much of our strategy just yet in the U.S." Similarly, Cronos Group's Gorenstein said that his company "won't telegraph our strategy" for the U.S. market as some of its peers have.
Which of the four companies appears most likely to succeed in the U.S.? I'll give a nuanced answer.
In my view, Tilray will be most successful early on in the U.S. hemp CBD market. The company will hit the ground running with Manitoba Harvest in its fold. It will take months for Canopy Growth to launch its first hemp CBD products. Tilray will immediately have solid connections with retailers and customers with its Manitoba Harvest acquisition and its deal with ABG.
But Canopy Growth will definitely play to win. The company also has a big partner with a successful track record in the U.S., Constellation Brands (STZ -0.33%). Canopy also has a big cash stockpile to fund its efforts thanks to Constellation's $4 billion investment. When the U.S. Food and Drug Administration finalizes regulations for CBD-infused beverages, Canopy's relationship with Constellation should give it an advantage over its peers.
I also think that hemp will only be a start. The odds that the U.S. will allow states to enforce their own marijuana laws are increasing. Sooner or later, the big Canadian marijuana producers will probably be able to jump into the U.S. marijuana market.
When that time comes, I think that Canopy's partnership with and money from Constellation will be a key factor. My take is that Canopy Growth remains the most likely to succeed in the overall U.S. cannabis market over the long run.