U.S. Cannabis Edibles: Billions of Revenue Dollars Today, $10’s of Billions Tomorrow

Cannabis edibles are a major theme in the cannabis industry for several reasons.
 

• A fast-growing market in the U.S. (estimated growth of 130% over the next 5 years)
• About to become legal in Canada nationally in Phase 2 of legalization (October 2019)
• Higher margins, better branding opportunities

Then there are the overall numbers.

Cannabis edibles are projected as a $4.1 billion industry in the U.S. and Canada by 2022. Globally, a separate forecast projects this as a US$11.5 billion market by 2025, representing a CAGR of 25.4%. Sales of cannabis edibles in 2018 are estimated to be as high as $2.3 billion, almost all of that U.S. sales.

That’s what is currently being projected for this space. However, when investors see why edibles will grow at an extremely robust pace, those forecasts look very conservative.

There are two separate but extremely lucrative revenue paths for cannabis edibles.

Cannabis (edibles) as an alcohol-substitute

Cannabis edibles infused with THC are aimed at the “recreational” adult use cannabis market. In other words, they are a direct competitor for alcohol products.

The alcohol industry is a $1 trillion per year revenue pie. Alcohol sales are now in permanent decline due to the many/serious health issues associated with alcohol. The most obvious destination for those consumer dollars is to (safe) cannabis products.

If just 15% of alcohol consumption moved to cannabis, that would equate to (globally) an additional $150 billion per year in cannabis revenues. As noted, edibles can/will claim a significant portion of those dollars.

Let’s put this into context.

The U.S. cannabis market is forecast to reach $24.1 billion by 2025. That’s for both the medicinal and adult use cannabis market.

In comparison, 15% of U.S. alcohol revenues would translate into an additional $35 billion in cannabis revenues all by itself (based on current U.S. consumption figures).

In California’s dual-use market alone, that would be an extra $3+ billion per year in cannabis revenues. And as noted in a previous article, edibles have been “gobbling up California’s marijuana market” as far back as 2017.

Meanwhile, Congress is holding hearings on legalizing cannabis nationally. That’s a (potential) national U.S. market for cannabis and cannabis edibles.

When considering only the market for THC-infused cannabis edibles, current sales forecasts for edibles look very conservative. There are $10’s of billions of additional revenues dollars on the table here.

Then there is the second major future driver of revenues for cannabis edibles.

Cannabis edibles as food

The other major category of cannabis edibles are CBD-infused edibles. The focus is not on an adult-use product but rather a health-and-wellness product.

Here even experienced cannabis investors require further education.

Most already know that cannabidiol (CBD) is a cannabinoid in the cannabis plant with enormous potential as both a medicine and for general promotion of health.

Regulators, most notably the FDA, regard CBD as “a drug”. However, as The Seed Investor has recently explained, CBD is not a drug.

It is a natural, healthy substance that is as safe as mother’s milk. Its health-promoting properties are more like those of a vitamin than a drug.

The FDA’s overly restrictive classification of CBD currently prevents any national market for most CBD products, even those derived from hemp (which is now fully legal).

The FDA is currently holding new hearings aimed at opening up CBD commerce in the U.S. Any significant movement here in liberalizing rules would be a game-changer for the U.S. cannabis industry.

But cannabis, specifically hemp, is also food. Packed with nutrition, hemp (and the CBD contained) offers not only enormous potential as a health supplement but also as a food additive. And simply as cannabis-based food products — edibles.

This leads to a major deal just announced in the cannabis sector.

Canadian food retailing giant Alimentation Couche-Tard has just made a CAD$25 million strategic investment in the cannabis industry. The subscription agreement with Canadian cannabis retailer Fire & Flower allows it to take a controlling interest in that company. It also contemplates up to CAD$380 million in “growth capital” for its cannabis ventures.

Couche-Tard is a CAD$7.7 billion company that controls 16,000 stores in 26 countries. For U.S. investors, Couche-Tard is better known as the parent company for Circle K convenience stores.

Today, cannabis edibles cannot be legally sold on grocery store shelves. If (or when) regulations on CBD are relaxed – especially CBD derived from hemp – then these cannabis edibles can migrate to grocery store shelves (like Circle K).

The global food retailing industry is a US$10 trillion per year revenue pie. Over the long term, cannabis edibles may claim more market share from the food industry than they take from the alcohol industry. This seems to be the thinking of Couche Tard.

A value opportunity in U.S. cannabis edibles

There was more recent news relating to cannabis edibles.

U.S.-based multi-state operator, IONIC Brands Inc (US:IONKF / CAN:IONC) has just closed on its acquisition of Zoots Premium Cannabis Infused Edibles.

Zoots is expected to immediately add approximately US$3.0 million to IONIC’s 2019 revenues. This is derived from sales in Washington State, Colorado, Illinois, and Massachusetts.

Included in IONIC’s near-term plans is to expand Zoots distribution into California, Oregon, and Nevada – other states in which IONIC is already active. This offers excellent potential for future revenue growth from Zoots’ edibles alone.

IONIC currently sits with a market cap of just US$17.1 million. This is despite the fact that the Company also boasts premium vape brands that already have dominant positions in Washington and Nevada.

Cannabis edibles have an incredibly bright future in the U.S. (and globally). It’s one more reason why value-hungry investors may like IONIC Brands.

DISCLOSURE: IONIC Brands is a paid client of The Seed Investor