"The commerce clause is undefeated" Mike Gorenstein, Executitive Chairman, Cronos
Mr. Gorenstein made this statement during a Hedgeye event for clients back in 2019 in response to a comment about how the industry will develop post-legalization. His commentary has been stuck in my mind, and interstate commerce is making its way into the Cannabis conversation. Adding fuel to that fire was the CEO of TLRY on his recent earnings call.
Since coming public, the CEO of TLRY has managed a company that incurred shareholder losses of nearly $1.0 billion, so we are not surprised to see him fully embracing the asset-light strategy when thinking about entering the U.S. market. He is upping the rhetoric by throwing shade on U.S. Cannabis MSO's, far more profitable and growing faster than TLRY/APHA will ever.
On the earning call, Brendan Kennedy, Tilray Chairman, President & CEO, said:
"I have a pretty strong opinion that the existing MSO adult-use model is not going to be the model of the future. I think it looks more like tobacco. I think it's more like alcohol. And I also think that adult-use cannabis products will cross state lines; you will see interstate commerce. And I think that's going to be extremely disruptive to entrenched players, extremely costly to entrenched players. And so that's what we look at. And that's what I imagine the combined company will look at when it comes time to deploy capital in the U.S."
These comments were not made in a vacuum, and we agree that a critical element facing the US MSO's is how the commerce model will evolve post-legalization. The TLRY CEO also noted that "we see a battle take place right now between the existing MSOs and the tobacco companies? Where exactly is this battle taking place, and who is battling whom? Is he suggesting that legalization will devastate the current operating models of U.S. MSO's?
Following the money (lobbying efforts) in Washington is a guide to understanding the battle he refers to. Will it be the tobacco or alcohol model that will shape the future of the cannabis industry? Or will a hybrid Cannabis model emerge that uses the current MSO retail framework for the industry operating structure post-legalization? Our early understanding of the Cannabis industry lobbyists and advocates is that they are not yet on the same page.
DIVISIONS IN CANNABIS LOBBYING
The TLRY CEO comments might also explain why Cannabis reform will be slow to develop in 2021. There appears to be a lack of cohesive consensus among all the various industry groups that will not allow them to get on the same page. Among these groups, is the topic of interstate commerce a key sticking point on legalization? Interstate commerce is a tricky issue; with the US MSO spending billions developing the industry infrastructure in its current form, will the #MSOGang allow all that to be undone by legalization?
Here are some of the Cannabis lobbying groups involved in the lobbying process:
- The National Organization for the Reform of Marijuana Laws (NORML) was founded in 1970
- The Marijuana Policy Project (MPP) was launched in 1995.
- The National Cannabis Industry Association (NCIA) was founded in 2010
- The Minority Cannabis Business Association (MCBA) launched in 2014).
- The Cannabis Trade Federation (CTF)
- The National Cannabis Roundtable (NCR)
- The Drug Policy Alliance (DPA)
- The Global Alliance for Cannabis Commerce (GACC)
- Countless groups focused on the hemp industry.
NORML and DPA have already coalesced in spirit into the Marijuana Justice Coalition and several other advocacy groups. As we said, the industry groups can't get on the same page because they're all jockeying for members in a way that advocates don't have to worry about.
A recent effort to change the conversation is the formation of the USCC (U.S. Cannabis Council), a nonprofit organization that "aims to advance social equity and racial justice and end federal cannabis prohibition." This group was formed in early February, just a few short days (maybe hours) after a meeting with three top Democrats. The coalition brings several major North American cannabis industry stakeholders together to convince policymakers in Washington D.C. to bring about legalization.
One challenge that the individual marijuana advocacy groups and trade associations have historically had is different legislative priorities and lacking rallying behind a cohesive message on Capitol Hill. Lawmakers will be the first to tell an industry - especially cannabis - that a unified and coherent message is critical to any reform effort on the Hill. All the fractions, entities, etc., want legalization, but in what form and how will the sticky issue of interstate commerce unfold? Without all the advocacy groups and trade associations coming together, comprehensive legalization will not happen.
In a news release, USCC interim CEO Steven Hawkins, who also serves as the MPP executive director, described the USCC as a "unified voice advocating for the descheduling and legalization of cannabis. Legalization at both the state and federal level must include provisions ensuring social equity and redress for harms caused to communities impacted by cannabis prohibition."
The founding members of the USCC include the Cannabis Trade Federation, Canopy Growth Corporation, Curaleaf, and Scotts Miracle-Gro, Acreage Holdings, Columbia Care, Cresco Labs, MedMen, and Vireo Health. However, several vital groups are missing from the USCC roster, including the NCIA, MCBA, and NORML. The USCC has nonetheless vowed to "end federal cannabis prohibition" while also "securing federal reforms that advance social equity" by tapping into the "resources, energy, and expertise of its founding members." Missing from the USCC are TLRY, APHA, & GRAMF (all are talking about an asset-light strategy in the U.S.) CRON, the original asset-light company, is a founding member of the USCC.
THE INDUSTRY GROWTH WAITS FOR NO ONE
As lawmakers think about legalization and investors contemplate the industry's future, some context needs to be presented, given the "shots fired" by the CEO of Tilray. The legal marijuana industry is growing faster than any other industry in the United States. Driving the industry revenues are increased consumer adoption, new form factors, and more states approve marijuana for recreational and medicinal use. Cannabis job growth in 2020 was 32% versus at a time when the broader economy was shrinking. The drivers for change will continue for years as new states are coming online, older markets are hitting their stride, and the stigma of decades past continues to dwindle. In 2020, U.S. sales of legal marijuana products were over $18.0 billion, a 71% increased YoY, driven by a 33% increase in average spend (that cant continue at the current pace). Legal sales of marijuana could easily pass $26.0 billion in 2021, and some have it a $50 billion industry by 2025.
MATURE MARKETS CONTINUE TO GROW
More than 57,000 Californians are employed in the industry in a mature state like California, where sales increased to $3.7 billion in 2020, up significantly over last year. The Cannabis industry accounted for more than 30,000 jobs in Colorado and Florida and 20,000 in Arizona, where voters approved legal marijuana in 2020 and where recreational pot sales began only last month. The number of states where consumers spent more than $1 billion on legal pot is proliferating (Colorado, Florida, Arizona, Washington, Oregon, Illinois, and Michigan). The unique operating structure where cannabis is still federally illegal prevents the product from crossing state lines has meant growth in jobs that other industries might not have created for efficiency reasons. Currently, cannabis sold in Illinois has to be grown in Illinois; cannabis sold in Colorado has to be produced in Colorado, and so on. This suggests that a certain amount of jobs from one state to the next might have been consolidated in the world with interstate commerce. Most of those jobs will be in the harvesting and cultivation segment and less in retail due to vertical integration. The retail component of the US MSO's is like the most valuable side of any business.
HOW WILL LEGALIZATION UNFOLD
Interstate commerce is a critical issue in the fight for legalization and is quickly becoming one of the trickiest problems. Importantly, we don't believe you can have legalization and social justice reform without taking on interstate commerce as an issue. Therefore, we believe that Cannabis legalization unfolds in two waves.
This first wave will take on banking and tax-related issues (likely a 2021 event). The second wave will take on the far more complicated social justice reform issues and interstate commerce (probably after the next mid-terms). As we said, industry growth and maturity are not waiting for anyone, as a growing number of states and their quest for new tax revenues won't wait for anyone. The Cole Memo represented a significant shift in the federal government to de-prioritize the use of funds to enforce cannabis prohibition under the Controlled Substances Act towards a more hands-off approach. As suggested by the Come memo, the founders realized that the best way to form a long and lasting Union was to give the power for self-governance and determination to the states.
Associate Justice of the Supreme Court Louis Brandeis was the first to popularize the phrase that states "are the laboratories of democracy." In his dissent in the 1932 case of New State Ice Co v. Liebmann, Justice Brandeis stated that: "a state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country."
With one-party control, the forces are slowly but steadily aligning on Capitol Hill, but the timeline is tight given that the midterm elections are just over 20 months away. Most legislation gets done in off-year elections (2021 and a few shorts months of 2022) before everything is looked at through the election lens, and legislating (beyond the spending bills) grinds to a halt.
I believe the CEO of TLRY made his thoughts public to help drive the conversation forward, but he also has an agenda because he has no access to the largest cannabis market in the world! The new TLRY/APHA needs access to the USA to become a legitimate Global Cannabis company!
More to come on this subject!
