“Cannabis 2.0” is here, and Canopy Growth Corp (TSX:WEED)(NYSE:CGC) is jumping in in a big way. With 32 products set to launch before December and 20 more next year, it’s fully prepared to capitalize on the newly legalized product categories.
One of the most interesting products the company is rolling out is chocolate edibles.
Made in partnership with Almonte’s Hummingbird Chocolates, the bars are available in three brands: Tweed, Tokyo Smoke, and Bean & Bud. Regardless of brand, each bar contains 10mg of THC. A variety of flavours are offered, ranging from Penelope and Sea Salt to Dark Milk Chocolate. These are interesting new product offerings, but can they save a company that lost $1.23 billion in its most recent quarter?
First, let’s look at the optimist’s case.
The optimist’s case for Canopy’s chocolates
The main reason that some people are excited about Canopy Growth’s chocolates and other “Cannabis 2.0” products is because they may have higher profit margins that cannabis flower.
Cannabis itself is more or less a commodity, which makes selling it a very competitive industry.
Branded niche products could produce higher profit margins, owing to greater brand and product differentiation.
Consider the beverage market. While soft drinks are extremely cheap to produce, top brands like Coca-Cola can sell at high prices relative to cost thanks to their brand identities. In blind taste tests, few can distinguish between Coke and cheaper “no-name” alternatives, yet that doesn’t stop the big brands from charging more.
That could be a good sign for companies like Canopy. If the company’s chocolates and beverages acquire brand recognition, then perhaps they could start charging premium prices like Coca-Cola does. However, that’s far from guaranteed.
The pessimist’s case against Canopy’s chocolates
Although it’s well known that established brands can charge high prices, it’s far from a given that Canopy’s new products will achieve that kind of name recognition. Brands take time to grow on people, and who knows whether, in the long run, it will be Canopy or some competitor whose brand identity sticks.
Additionally, it’s hardly guaranteed that any of these novel products will catch on.
Although many marijuana smokers report being excited about legal edibles, it’s not clear that they’ll flock to them in droves. A recent article from The Verge reported that cannabis-infused beverages only made up 2%–3% of cannabis sales in markets where they were legal.
Chocolates could fare better, since edibles are a more established part of cannabis culture than beverages are, but all of this remains to be seen.
Foolish takeaway
One year after legalization, it’s clear that most cannabis companies are still hurting for profits. Although some individual producers have inched toward profitability, most have seen their losses increase.
Canopy, with a $1.23 billion loss in its most recent quarter, has been one of the worst offenders. Its branded chocolates, with their promise of higher margins, could help save the stock if they catch on. For now, though, it remains to be seen whether they will.
