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CBD Up Close

CBD Up Close

Cutting through the CBD hype

When Will Market Consolidation Happen in CBD Industry?

April 18, 2019 by Travis Lindsay Leave a Comment

An article from Barron’s earlier today got me thinking about the CBD industry (and the larger cannabis industry in general) in terms of when there will be consolidation in the CBD industry. And CBD Up Close thinks that there will definitely be consolidation in this marketplace sooner rather than later. In fact, it’s already happening.

How Will The CBD Industry Consolidate?

As illustrated by the Barron’s article about Aurora Cannabis acquiring Hempco Food and Fiber, a maker of “hemp-based foods, hemp fiber and hemp nutraceuticals,” there already is consolidation in the CBD industry. Further on down the article, we find out that the real value in this deal for Aurora is that “‘Hempco provides Aurora with low-cost, high-volume access to raw material (hemp) for the extraction of CBD, which has been increasingly recognized for its therapeutic benefits across a wide range of medical indications and wellness applications,’ [Aurora] said in a statement.”

Vertical integration, which is where an existing company expands into a different part of the supply chain (i.e. Amazon expanding from being an online retailer into manufacturing products as well). This is exactly what Aurora is doing. Yes, they obviously had access to raw hemp before but now with the purchase of Hempco they have more control over their supply.

And, as time goes on, CBD Up Close believes that there will be more vertical integration happening if only so that growing companies can have more control over their supply. We will also start to see more competitors buying each other out as well and, in a few years anyways, we will start to see existing traditional companies make acquisitions in this space. (It’s already happening a little bit now but what we see is something along the lines of a company of the stature of, for example, Coca Cola purchasing a company like, hypothetically, Canopy Growth in order to quickly gain market share in the CBD space. But, again, we think that that sort of type of acquisition is years away.)

CBD Supply Chain

Here’s a good, quick synopsis of the current state of the CBD supply chain from CNBC:

The current supply chain — from plants, to extraction, to labs — is riddled with issues. And the nascent industry is trying to work through the kinks at the same time demand is ramping up, leaving producers frustrated and consumers stuck trying to sift good products from bad ones.

“There are huge challenges to producing the industrial hemp required for meeting the demand,” said George Weiblen, a professor at the University of Minnesota who has been studying cannabis since 2002. ‘It’s not as simple as growing tomatoes. It’s just not. … The possibility of failure to produce quality cannabis extracts is huge.’

“Decades of modern farming techniques have tamed staple crops like corn and wheat. Farmers know what to expect when they plant these crops and can follow a pretty straightforward set of guidelines when they grow them. With hemp for CBD, not so much.”

Basically, what all of this means is that CBD isn’t necessarily good or, to put a more positive spin on it, CBD isn’t as good as it will get once production practices become more refined. This also means that, if current projections of explosive growth for the CBD industry hold true, there is going to be a ton of competition at all levels of the supply chain and that prices are going to go up by virtue of increased demand.

Those companies that are able to introduce more efficiencies into production will be the ones that will experience the most growth. Eventually, these companies will start buying out their competitors, probably for inflated prices since the industry as a whole will be doing very well, and will become prime targets for much larger companies that may be higher up the supply chain.

CBD Up Close also expects private equity firms to continue their expansion into this space. Some will focus on a particular slice of the supply chain while others will try to have an investment portfolio of vertically integrated companies.

Like we mentioned in our recent post about the Carl’s Jr. Rocky Mountain High: CheeseBurger Delight, now is probably the best time to be in the CBD space. It’s certainly a seller’s market and every projection we have seen predicts at least double digit growth for the CBD industry for years to come with the most aggressive predictions saying that there will be triple and maybe even quadruple digit growth for the foreseeable future.

In other words, make sure that you are in this space and try to be better than the competition! Obvious advice but the ROI for companies that are able to do so should be astronomical.

CBD Up Close can’t hazard a prediction about where the industry will be in 25 years, that’s an awful long way out, but what we do believe is that within the next three to five years we will have a healthy percentage of S&P 1,000 companies who have at least one CBD product in their portfolios. And that there certainly will be consolidation in the CBD industry.

Filed Under: cbd business Tagged With: Aurora Cannabis, Carl's Jr., cbd, CBD supply chain, CBD vertical integration, Hempco Food and Fiber

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