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Is This Company Going to Be the “Starbucks” of Pot?

Marijuana still hasn’t been legalized in Canada or the U.S., but that isn’t stopping one company from trying to create a model that can be franchised and put into locations across North America.

Obviously, this plan cannot be implemented anytime soon, since, south of the border, pot is still illegal at the federal level, and while it may be legal in individual states, it could still pose some risk.

Nonetheless, Golden Leaf Holdings Ltd., which trades on the Canadian Securities Exchange (CSE), is making some ambitious goals for itself.  The company has already launched stores in Oregon under the name of Chalice Farms, but it is looking to grow beyond those borders.

The company’s CEO, William Simpson, stated that, “Like Starbucks is to coffee, we believe Chalice will be to cannabis.”

This is no small statement to make, and although this might sound appealing to investors, there are more than a few issues that will get in Golden Leaf’s way.

Legalization will present a significant hurdle

Pot is expected to be legalized in Canada later this year, but in the U.S., legalization is still likely many years away and would require a more cannabis-friendly government to be in power. At minimum, we’d be looking at likely three to four years, and that’s assuming that legalizing cannabis would be a priority for a new president.

Without marijuana being legalized at the federal level, cannabis would be not able to be transported across state lines, and that would mean Golden Leaf would need a manufacturer in every state it wants to operate out of, which would make it difficult to ensure the quality and consistency of its products.

There is plenty of competition already in place

Legalization is a big hurdle, and if pot were to be legalized in the U.S., you could expect a huge increase in the number of cannabis companies that start to set up shop there. Securing market share would be difficult, and big tobacco and pharmaceutical companies would likely get involved and acquire their way to significant positions in the industry.

We’ve already seen what hype can do to the industry in Canada, where many pot companies have listed on the TSX and venture exchanges in the past few years.

Canopy Growth Corp.  (TSX:WEED) and Aurora Cannabis Inc.  (TSX:ACB) are currently the big names that dominate the industry today, and with advertising being a big hurdle in Canada, it would be difficult to take market share from those well-established brands, which already have brand loyalty and name recognition.

Even on the CSE, Golden Leaf faces competition from Cannex Capital Holdings Inc., which is a big player in neighbouring Washington State.

Bottom line

Golden Leaf’s plans are ambitious, but there are just too many reasons why investors should remain skeptical. Not only are there legal and competitive forces that will limit its effectiveness and ability to grow, but the whole point of someone forking over money for a franchise is to get a proven business model and minimal risk in return, and Golden Leaf wouldn’t be able to provide any of that.

The company first needs to get its house in order and prove to prospective buyers that it is successful; otherwise, it will be difficult to prove that its model is worth replicating.

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Fool contributor David Jagielski has no position in any of the stocks mentioned. David Gardner owns shares of Starbucks. Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of Starbucks. Starbucks is a recommendation of Stock Advisor Canada.

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