Will Canadian Cannabis Consumption Really Double Amid Advertising and Branding Restrictions?

The recent recommendation of the federal task force in charge of regulating marijuana legalization that promoting cannabis in any way that would encourage usage to increase will be illegal has beem met with deaf ears as investors continue to pile into Canadian cannabis producers at valuations that continue to skyrocket.

Valuation concerns aside, and I have many, the recent affirmation of regulatory restrictions on advertising and branding are significant headwinds investors are not taking seriously enough. Fellow Fool contributor Joey Frenette recently highlighted some of the concerns he sees on the regulatory viewpoints of the Canadian government. I have to agree wholeheartedly with him on this one.

Having a regulatory environment that intends to limit the consumption of marijuana by imposing packaging restrictions similar to that of the tobacco industry rather than the more liberal advertising rules placed on the alcohol industry is a very big deal for cannabis investors. Indeed, some industry experts, including Canopy Growth Corp.  (TSX:WEED) CEO Bruce Linton recently suggested that the market for legal weed could top $8 billion per year (or nearly double the current Canadian consumption levels according to recent studies). However, in the face of the suggested advertising and branding restrictions, I just don’t see how this scenario would play out.

The argument among many in the cannabis sector is that marijuana usage has always been taboo; the illegal element undermining whether survey respondents will give truthful answers in Statistics Canada surveys has led some to believe that the market for cannabis in Canada is really a multiple of the alcohol market.

While this may be true, and Canadians may indeed move from alcohol toward cannabis consumption as a replacement good, the reality is that tobacco sales have continued to decline in Canada over time, due in large part to advertising rules put in place to limit consumption. Having similar negative images displayed on cannabis packages while withholding many of the medicinal benefits of cannabis could lead some consumers to second-guess their decision to try pot this summer. Indeed, a significant percentage of growth expected in the legalized environment is expected to come from first-time users — a group that will certainly not be persuaded to buy cannabis with less than inviting packaging.

Given the lack of real data and the highly speculative nature of the Canadian cannabis industry, I urge investors to seek growth opportunities elsewhere.

Stay Foolish, my friends.

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Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

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