A Strategic Framework for the Canadian Medical Marijuana Industry

Ever since I was recruited and offered the role of CEO of one of the Licensed Producers of Medical Marijuana in Canada (a role I ultimately turned down), I have been intrigued with the industry. Having spent 25 years in Consumer Goods, in Spirits, Food and OTC Pharma, I believe the industry will ultimately be very successful. This said, I believe many of the current players, will not.

I have written, or been part of the team writing, many strategic plans, and I wanted to provide my thinking, as it relates to strategic pillars that should be developed and deployed within the Canadian Medical Marijuana industry. Like any good strat plan, I want to start with my assumptions:

1. Marijuana will be legalized within the next 5 to 7 years. While Steven Harper is against legalization, I do not believe the Conservative Party is. We know the Liberals, under Justin Trudeau, are in favour. The NDP, as a tax and spend and social liberties ideology, would certainly get behind it, given the tax revenues to be gained. In the interim, the LP's need to build a successful business model under the MMPR, that can be transitioned to a legalized model, in the future.

2. The Government will regulate pricing. There is no way they will allow bargain basement prices on pot. There are 2 reasons. It goes against social responsibility (the same rationale for social reference pricing and annual price increases on beverage-alcohol). The second reason is, if they adopt an ad valorem mark-up structure, the higher the price, the more absolute margin the government makes.

3. Strains will not be materially different from LP to LP and will be consistent in strength and quality. This assumption is required or the whole analysis is moot. The government will never allow an industry that cannot control the consistency of its product, especially one that is currently considered an illicit drug. I believe the LP's will get down the learning curves on agricultural and horticultural techniques, as well as genetic cloning and mapping, to be able to create and procreate, the same plant, time after time.

I believe the government will also put some regulations in place regarding the % of CBD or THC in a given strain (except, in cases where there is a clear medical rationale, in which case, these will always stay as a prescription-required product)

Where we might see a functional point of difference, is in delivery systems - the vaporizers, vape pens, as well as in the edibles (in terms of the creativity and taste of the edible). So LP's will not get any POD benefit from the former, but they can get a benefit from the latter.

4. The Government will have a level of control and influence over the route to market. The current MMPR system may stay in place until legalization. The illegal dispensaries will go away - the government cannot allow them to remain and there will be a straw-that-breaks-the-camel's-back on this one. So MMPR RTM rules until legalization. At that point, it goes one of 2 routes:

a. A government retail model like the LCBO.

b. An OTC model, with the pharmacist as gatekeeper. I just think the drug side of marijuana might push this to have the pharmacist as part of the process, to counsel purchasers. The pharmacist's also have one of the strongest lobby groups, and I think they might look at this as a way to get people into their pharmacies more often, and they might buy other products while there. 

So, with these as the core assumptions, what do I believe to be the lead strategies for deployment?

1. Low Cost Producer will not be a Winning Strategy - because pricing will be regulated, a LCP cannot leverage it to undercut competition on retail prices. While they can make more profit, in a LCP model, they likely will not put it back into ATL spending (nor will they likely have anything to advertise or promote about the product, given it will have all the value-add elements/costs engineered out). So, like any good business, leverage lean manufacturing and drive out non-value added costs in SG&A, but a full LCP strategy is not leveragable.

2. Differentiation-based Strategies will Win. These will likely not be in the functional benefits (medical or psychological), as, in the case of medicinal, I assume all LP's will have strains that address the key symptomatic areas. In the case of psychological, the government will not allow it to be advertised (just like you cannot talk about abv or getting drunk, in beverage-alcohol).

Now, which differentiation-based strategies will win? Broadly (I am not giving up everything in this post), I see them falling into either Image-Based, or Service-Based differentiation. Brands will be the cornerstone.

3. Having a well developed Registrant-Capture Strategy will be Key - but who do you target? Right now, I believe most LP's would say "people who want medical marijuana". Great. I essentially got that as a response from one LP CEO ("We target high THC, high CBD and balanced THC/CBD patients"). 

Part One A is broad awareness - Physician Education - this should be an Industry Association priority. It makes no sense and is hugely inefficient, to have each LP out detailing doctors. The education is about the category - the category is the industry. Ergo, the industry should lead it.

Part One B is Consumer Education - this too should be an Industry Association initiative. 

The winning LP's will have done the research to segment the market and identify the target consumer group(s) and their need states and insight-driven motivators of usage. They will leverage initiatives like incumbent registrant referral incentives, subsidized registration, subsidized delivery system costs (eg. vaporizers). They will develop brands that have the personality that connects with the target. 

4. Once registered, the Winning LP's will have a well developed Consumer Relationship Marketing tool, that can collect, code and cut the data, allowing them to customize messaging and margin-up registrants, in purchase frequency and price point.

5. A co-pack adjacent industry for edibles will emerge - the expertise and assets required to mass produce, consistent, great tasting, CFIA-compliant edibles, will be a challenge. I see LP's extracting (or sending for extraction), their plant material, with the co-packer producing to their unique spec (along with some off the shelf product that LP's can buy). Now, some LP's will do it all on their own, but many will not.

6. Partnerships with the leading delivery systems will emerge. Now, in this case, the leverage sits with the delivery system (eg. vaporizer/vape pen). They may want a fully open system, to maximize sales. But, they may be willing to develop unique units for specific LP's, taking a development fee and possibly a % of product sales. The only way the latter works, is if the LP can develop a unique product that is the only one that fits the delivery system (think Keurig 2.0 or Tassimo).

There are a number of other areas of strategic leverage, but I will leave those for another time. Most certainly, this is an exciting, emerging industry, but one that requires a much clearer, structured and focused strategic plan.