Why Marijuana Edibles Could Be Another Big Disappointment for the Industry

Hexo Corp (TSX:HEXO) may not have as big of an advantage as it had hoped in the edibles market despite securing a deal with a big beverage maker.

| More on:
Marijuana plant and cannabis oil bottles isolated

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

The edible marijuana market is launching in December, but it may not result in the boom that many are hoping or expecting for. Health Canada unveiled its plans for edibles and like its first launch of cannabis products, there will be some significant restrictions for cannabis companies.

Not only will advertising remain very limited, but it will create inefficiencies for companies that already make food products, as they’ll need a separate facility for cannabis edibles to avoid cross-contamination. Despite the concerns about restrictions on the industry, Bill Blair, who is responsible for the cannabis policy, said. “It’s not the government’s intention to promote the use of this drug, but rather to make it legally available in a well-regulated manner to reduce the social and health harms often associated with cannabis use.”

However, the danger is that by being so restrictive, it gives the black market a lot more power by providing consumers with more attractive and flexible options. One of the goals of marijuana legalization was to shift cannabis sales away from the underground. With cannabis prices already much more expensive and the difficulty of advertising and reaching consumers, it puts companies like Hexo Corp (TSX:HEXO) at a big disadvantage in relation to their U.S. counterparts.

While Hexo landed a deal with Molson Coors Canada, and although it will help the cannabis company develop infused beverages, it won’t be able to take advantage of its partner’s brand. Under the regulations, a cannabis product can’t be associated with an alcohol product. It negates one of the biggest potential benefits that cannabis companies had by linking up with successful beer makers: selling products with their popular logos.

Restrictive packing requirements means that Hexo won’t be able to have a co-branded product with Molson that can utilize the company’s image. It’s a big disadvantage for the company, especially when you look south of the border to states that have permitted cannabis where regulations are much looser, and companies can have a lot of freedom when it comes to advertising and marketing their products.

It’s no surprise that the industry has been doing so well there. With a much smaller population and more restrictions, the Canadian market looks much less appealing in comparison to its U.S. counterpart.

What this means for investors

From an investment standpoint, this tells me that even though Hexo may be one of the top cannabis companies in Canada, the better buy might be in the U.S., where there’s definitely a lot more growth potential for marijuana. The rollout of cannabis in Canada hasn’t been smooth, to say the least, and with many restrictions in place on edibles, it’s not going to get any better anytime soon.

These restrictions come with a liberal government in place that was strongly in favour of legalizing cannabis. We could see the industry throttled even further should conservatives get into power and try to impose even more requirements on companies.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

More on Cannabis Stocks

edit Cannabis leaves of a plant on a dark background
Cannabis Stocks

Canopy Growth Stock: The Only Cannabis Stock to Consider Long Term

The cannabis stock industry remains an incredibly high risk one, but Canopy Growth (TSX:WEED)(NYSE:CGC) stock provides the best opportunity for…

Read more »

edit Cannabis leaves of a plant on a dark background
Cannabis Stocks

Should You Stay Away From HEXO Stock?

HEXO (TSX:HEXO)(NASDAQ:HEXO) stock is on a downward spiral, and there is little hope it is going to recover soon.

Read more »

edit Cannabis leaves of a plant on a dark background
Cannabis Stocks

Why Did Aurora Cannabis (TSX:ACB) Stock Plunge 75% in 2022?

A prominent cannabis stock has plunged by 75% in 2022, as the company’s losses continue to mount in the face…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Fire & Flower: A Small Pot Stock Poised for Strong Growth

Fire & Flower is a cannabis retailer well-positioned for growth thanks to its digital and delivery initiatives.

Read more »

edit Jars of marijuana
Cannabis Stocks

Why Aurora Cannabis (TSX:ACB) Stock Is Sinking This Week

Starting another round of capital raising has hurt investor sentiments, and the Canadian cannabis giant’s performance on the stock market…

Read more »

edit Jars of marijuana
Cannabis Stocks

Why Canopy Growth (TSX:WEED) Stock Plunged 19% Last Week

Canopy Growth Corp. (TSX:WEED)(NASDAQ:CGC) stock has plunged after the release of its final fiscal 2022 results.

Read more »

Cannabis stocks have fallen.
Cannabis Stocks

Why Aurora Cannabis (TSX:ACB) Stock Tanked 45% Last Week

There's no respite for Aurora Cannabis investors!

Read more »

Money growing in soil , Business success concept.
Cannabis Stocks

TFSA Investors: This Undervalued Gem Could Turn $6,000 Into $25,000

Here's why TFSA investors can hold undervalued growth stocks such as Verano in their portfolios right now.

Read more »