We at TheCannalysts have predicted that white label product offerings will expand in the Canadian legal cannabis sector.

I see this as disruptive for several reasons. A retailer with some measure of customer loyalty (and selling ability at the register) is able to path higher margin sales via their own branded products. Brand houses do this as well, putting in the marketing and distribution that’ll support what their promise to the consumer is, no matter where the product is sourced from. All that’s needed is a logo and a formulation that they want to present.

For licensed producers, this presents a challenge: do we produce for our own brands, or, do we choose to become a sub-contractor?

There’s distinctions between brand houses and simply plain ol’ branding – but what I’ve been hearing from industry leadership lately is the lack of segmentation and generalization that currently exists in the sector. Current thinking is that no other CPG category in the world retains such a high degree of verticality. The thinking is that in competitive markets, no company can be everything to everyone and maintain profitability….that specialization/focus on core competencies becomes requisite. That there’s too many promised total ‘front-to-back’ outfits ($ZENA, $AH, $WMD, $FIRE, $ACB, $XLY, $OGI, $SNDL, $CRON, $TLRY, $HEXO, $WEED, $TGOD, and $VFF), which, pretty much add up to pretty much all of the market cap of the entire Canadian sector.

It’s an opportunity for extractors, they are specialized by design – and as our podcast with Tom Ulanowski from Nextleaf reveals – extractors are the natural point of raw material transformation. Indeed, Tom used the phrase ‘ingredients’ more than once when referring to output. This is a different perspective on extraction and ‘2.0’ that’s largely been seen so far, and it’ll become standard language in no time.

A natural internal tension will also emerge…..as extractors with proprietary brands while providing ‘white label’ services are effectively creating competing products against their own. This’ll be managed by each company to whatever degree.

I also ask Tom about the distinction between ‘formulation’ and recombination: as this sector matures, as I expect a ‘Coke’ or a ‘Pepsi’ (relatively speaking) to emerge. That there will be a ‘flavour’ or ‘effect’ that a company produces in 2.0 that hits a broad swath of a demographic or region. Competitors will re-tool to follow, and business life goes on.

I’ve seen several comments both in our Reddit channel and beyond recently musing why 2.0 product formation hasn’t been as brisk as what companies are capable of. Or why some companies might be holding back on SKU creation. It isn’t difficult to answer, and the best articulation I’ve heard of it comes from retail no less.

I asked High Tide ($HITI) CEO Raj Grover if he was planning to sell a white label 2.0 products with his name on it. He said of course, that this has been something planned since virtually inception. So, I asked…..when? His answer?

“……at the moment the price compression in the industry is quite severe and to commit to White label SKU’s is like catching a falling dagger. So we are waiting it out until the market settles a bit more”.

I’m not telling tales outside of school here. Most C-suites in-sector see this exactly the same way. There is little sense in commissioning product at a cost that will be materially less in a few months. Nobody wants to get stuck holding low or negative margin product when the next round of discounting on vapes or derivatives rolls through. And so….it essentially boils down to a commercial game of ‘musical chairs’ for now.

Expect this to change at the end of this quarter or into the first quarter of 2021. Fire and Flower’s ($FAF) sugar daddy Couche-Tard ($ACT) is intimate with merchandising white label, and I have little doubt they’re in the same headspace at the moment.

GoBlue’s chronicled some of the macro elements that’s led to our current state, as I’ve written about the micro aspects of vape price declines and increasing competition.

Some thoughts for you on this Wednesday. And that a hard segmentation of the sector is the current thinking of leadership. Look at your investments through that lens, and you’ll be likely to see more coherence around company actions/inactions at this time.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. In all of the companies mentioned, the author holds position in $APHA, $HITI, and recently closed positions in $XLY.