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TORONTO – Cronos Group Inc. is one of two Canadian cannabis producers to sign a multi-billion dollar deal with a major US company.
The $ 1.8 billion investment from Marlboro's manufacturer, Altria Group Inc.
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made in Cronos
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in December, a company that produces far less cannabis than competitors such as Canopy Growth Corp.
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.
Chief Executive Officer Mike Gorenstein, who practiced law in the United States and who was once a Google partner at Alphabet
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venture capitalist, now has a huge war chest to finance Cronos' ambitions for cannabis.
Previously Canopy Growth's understated co-CEO on the pot company's ambitions in the US and more
MarketWatch met with Gorenstein at the company's downtown Toronto office this week to discuss his vision of the cannabis market, how he manages the Altria contract and the evolution of the cannabis industry, particular with regard to the use of related services.
This interview has been modified for clarity and length.
MarketWatch: Many of your rivals have drink agreements. What are your prospects for cannabis products in Canada compared to currently available oils and flowers?
Gorenstein: After the non-floral categories, the vaporizer is clearly the biggest. Then come the edible products, the hot topics, and then you start wondering how to classify pharmaceutical formats. Then you enter the drinks.
For tetrahydracannabinol, or THC, at least, you have to change the way consumers currently consume the product. Retailers today are not configured for mass distribution of beverages – the trucks, for example, you need are different. It will take time for drinks to take shape. … If you can not order it at a restaurant or bar, it will really hurt the category. Finally, we should be able to have that, but I do not see him coming out the door.
MW: The demand for cannabidiol or CBD byproducts surprised many licensed Canadian producers, given the amount of product available in store relative to perceived demand. Why was it?
Gorenstein: I think that largely comes from the forecast and the product line, and when you look at what the provinces originally asked for in the orders, you just have to allocate your gross base, and it takes time to right the situation. You must go through the different stages of cannabis cultivation. Initially, it was thought that the demand would be for more THC products, but CBD has proven to be popular.
If you consider the CBD as a category, and how it will be in the United States, and how we thought it would be here, if you can not reprogram it and sell it normally, will the competition be? It's so much more expensive for a cannabis retail business, given the middle distributor and the margins that it almost feels like it's only THC and CBD is more accessible. THC, for example, is taxed, while CBD is not.
MW: How should investors think about the Altria deal and some of the health issues that society faced in the past when you were trying to develop medical brands alongside leisure products?
Gorenstein: If you're asking how do you reconcile things, what you would probably be asking from this industry is to invest in a medical product, a useful product, and I think that's part of what you see. If you look at the investments made by Altria – I can not say more 20 or 30 years ago – the company is really focused on reducing risk and expanding choice. And that's what characterizes the investments they make. I think we are in a position that does not hurt Altria if we produce more medical products, it does not take away their existing market share. Same thing with recreational products; same thing with CBD products.
I think that in terms of incentive, we always have access to the supply chain, to distribution. I think we have the capital and the infrastructure to market the products, regardless of the distribution channel.
MW: One of the issues frequently raised by cannabis companies is the production problems that contributed to supply shortages across the country in the early days of legalization – excise tax stamps being an example of a specific problem . To what extent do production problems remain in the industry?
Gorenstein: The big problem is that we also expect packaging to continue to change. For example, with vials of dyes, you need to decide if you want to completely automate this process. It takes time to set up the necessary equipment. But we now know in October that the packaging rules are changing again. If you had to design this custom automation that could apply tax stamps, the problem is, if you design it for a specific package, will you use that package in six months?
I think that's one of the things when we talk about packaging, tax stamps are a minor detail, but all these processes have been put in place – most companies you think of have spent five years in design the automation of a single package, which will remain the same. It's a big innovation project to switch to another packaging. A lot of our job is to look at what we think is the final packaging, and a packaging that will switch, we still think and hope that the packaging rules will evolve in the same way as today.
MW: Does Cronos need companies specializing in cannabis software, as US cannabis companies do? For example, what is the Oracle Corp.
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of pot?
Gorenstein: When you ask what is the pot oracle, my answer is Oracle. But we are in a privileged position in Canada. When you ask me who is the oracle of the pot in the United States, I do not know. But the question I ask is, how long do you think you can build a business? [with] a solid gap that could prevent people from moving to Oracle before it's legally federal? And do you believe that Oracle can plug this hole? Will this have any value once cannabis is legal in the United States?
MW: What are the restrictions, if any, imposed by your collaboration with major software vendors, and are there still problems?
Gorenstein: When it comes to working with software companies, we do not really have restrictions. Sometimes there is increased diligence because it's a new industry, but it's not really a restriction for us. At least now, we do not have to deal with this problem. When we started, we did not even transfer money to the Securities and Exchange Commission for our Nasdaq registration fee; I had to do it personally. They feared that we would end up funding a criminal organization. They stop because they see cannabis. Sometimes there are overflows like that, but you can finally overtake them.
These software services are also things that you will see optimized and improved here – enterprise resource planning software, point-of-sale, card processing, component planning software, all of which are ongoing, but this is not instantaneous. As they go online, things will move much more easily. But the stigma, in my opinion, has mostly eroded.
MW: What areas of software and technology in Canada still have significant room for improvement?
Gorenstein: I would say data. Now you see Nielsen
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provide certain services, but this is not exhaustive.
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