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Canopy Growth Corp.: Is the Stock a Must-Buy After the New Brunswick Deal?

Canopy Growth Corp. (TSX:WEED) recently inked a deal with the province of New Brunswick to be one of the primary suppliers of cannabis once the drug becomes legalized across the nation.

The government of New Brunswick plans to create a Crown corporation which will oversee sales of marijuana across the province. This is a vastly different approach to Ontario’s plans to sell exclusively through government-run LCBO physical and online stores. In comparison, I believe New Brunswick’s cannabis-distribution plans offers retailers more in the way of flexibility, which is a huge positive for shareholders of Canopy.

In comparison, I believe New Brunswick’s cannabis-distribution plans offer retailers more in the way of flexibility. This is a huge positive for shareholders of Canopy, which has invested a great deal in branding.

A huge step for the cannabis industry; a gigantic leap for Canopy

While many specifics regarding New Brunswick’s distribution plan are still unknown, I believe the recent deal is a major leap forward for Canopy, which has been getting deals done with the hopes of cementing its position as one of the world’s top cannabis producers. Canopy CEO Bruce Linton has made it clear that his company is all about the branding, and if New Brunswick will still allow non-government-owned cannabis stores, it’s likely that the power of Canopy’s brands will really start to give the company a major edge in the early stages of an emerging industry.

Ontario’s LCBO-run stores will probably be very bland. I suspect all the cannabis sold in these locations will be in generic containers with minimal branding or promotions. Let’s say you’re walking into your local LCBO-run cannabis store. You’ll probably specify the strain you want to buy, and the merchant will give you a generic jar of cannabis with minimal branding on its label. Tweed logos? Snoop Dogg images? Forget about it. A discrete brown paper bag is the most you can expect in the way of packaging.

New Brunswick creating an environment that favours superior branding?

Now, let’s suppose you walk into a premium pot shop that isn’t run by the government (potentially a pot shop in New Brunswick). You’ll probably notice that the Tweed logo is visible all over the shop and Snoop Dogg promos are on the walls. The merchant will probably steer you in the direction of Canopy’s brands by claiming that they’re the “Marlboro of cannabis.” You walk out of the store with classy packaging clearly showing the brand, and after a couple more visits, you’ll probably favour Canopy’s brands over generic or lesser-known brands produced by Canopy’s peers. You may even be inclined to pay a premium!

That sounds like a much better experience than the strictly regulated LCBO-run stores in Ontario, doesn’t it? Meanwhile, Canopy will be raking in the profits as the power of its brands starts to shine. Canopy will likely enjoy a tonne of sales at a greater margin. That’s the power of branding!

We can only speculate at this point, but it’s a possibility that this is how cannabis sales will be in New Brunswick. The provincial government stated that the purpose of the new Crown corporation was to “provide flexibility and lay the groundwork for the eventual retail model once final decisions around that have been made.” That’s an encouraging tone, and I believe shares of WEED should be rallying higher following what I believe is a very positive development.

Bottom line

Canopy has been doubling down on brands, while its peers in Aurora Cannabis Inc. and Aphria Inc. have been investing most of their time and energy in improving operational efficiency, which is also important; however, building relationships, brands, and a name for yourself are also extremely important. If more provinces opt to be flexible with regards to cannabis sales, Canopy will be a major winner, at least in the early stages of legalization.

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Fool contributor Joey Frenette has no position in any stocks mentioned.


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