(Bloomberg) -- The U.S. federal ban on cannabis may soon come to an end. But the fragmented market makes it difficult to pick a winner, Piper Jaffray says.
“We believe successful brands can emerge in the US, likely built on product differentiation, but in early stages of a new industry, it can be hard to identify long-term winners, ” analyst Michael Lavery wrote in a note to clients.
Lavery predicts the legalization of cannabis and products with THC may come in the next two to five years. Even as some emerging U.S. brands such as MedMen Enterprises Inc., Lowell Herb Co., and Pax Labs Inc. appear to have early traction, the market is still highly fragmented. That leaves a big hole for Canadian operators like Canopy Growth Corp. and Tilray Inc. to enter if laws change.
Not to say American cannabis companies aren't trying. MedMen is looking to drive higher in-house brand sales to lift margins. Lowell is currently the leader of pre-rolled joints in California, with 35 percent market share. Pax only produces hardware, avoiding the risks associated with a plant-touching business. And the U.S. market itself presents unique advantages as retailers compile significant customer data by scanning IDs of each person who walks through the door and every purchase.
One proxy for how cannabis companies may grow is the e-cigarette market, says Lavery. In 2013, the top five players held a combined 40 percent of total market share. Today, that number is 97 percent, led by JUUL Labs with over 70 percent. In the cannabis sector, Lavery estimates that the seven largest publicly traded U.S. cannabis operators captured six percent of market share at most in 2018, leaving space for Canadian companies to enter post-prohibition.
“We do not know who the eventual cannabis category winners may be,” writes Lavery. “We expect consolidation over time and believe Canopy's $4 billion war chest of cash and Tilray's relationship with US operator Privateer likely help position both for success in the US.”
To contact the reporter on this story: Sebastian Pellejero in New York at spellejero@bloomberg.net
To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Sebastian Silva
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