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Smarter Perspectives: Cannabis

Podcast: U.S. Market Prospects and Challenges

Guest John Sharpe, Steve Katz (host)

John Sharpe joins Steve Katz on the Hilco Global Smarter Perspectives Podcast Series to discuss the impressive growth of the US cannabis market over the course of the pandemic, as well as about some of the industry's current and future prospects and challenges.

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Steve Katz  0:08  
Hello again and welcome to the Hilco Global Smarter Perspective podcast series. I'm your host Steve Katz. Today we're speaking with John Sharpe Executive Vice President at Hilco Commercial Industrial about the impressive growth of the US cannabis market over the course of the pandemic, as well as about some of the industry's current and future prospects and challenges. Just as a little quick background, Hilco Commercial Industrial is the preeminent global leader in providing advisory evaluation and monetization solutions to the commercial and industrial sector. HCI can provide clients with asset acquisition, disposition, and advisory solutions, as well as the capital needed to derive maximum profits from their assets. With that said, welcome to the podcast, John. 

John Sharpe  0:50  
Thanks, Steve. Pleasure to be here. 

Steve Katz  0:52  
Well, it's great to have you on with us today. And to get started, I'm hoping that you can give us the lay of the land in terms of where things now stand in the cannabis market penetration across the US.

John Sharpe  1:05  
Certainly, you know, obviously, an interesting dynamic with cannabis, the most important thing we've seen, especially in the landscape, here in the US is the attitudes towards it. And basically, you know, as a lot more accepted, there's been a tremendous growth in the cannabis market, primarily because of these attitudes, for recreational usage. But also, there's a large advocacy for medical purposes, especially in the last, you know, over the year during a pandemic, subsequently laws that reflecting that are making a little more ease and friendly for people to enjoy, if that's their preference, or certainly for physicians who may prescribe it for patients, though make no doubt about it. It's a huge booming industry. I mean, 90% of the global market share, is this in North America alone.

Steve Katz  1:50  
Yeah, that's that is sort of surprising to me. But I guess it part of that is the regulatory environment in Canada, and the US. And I think that's part of why we're seeing such significant growth here in the us right now. I know, John, that your team is dispersed globally, and that you're based in the Toronto area, specifically, cannabis was federally legalized in Canada over two years ago. So seems logical for you to give us some perspective on what happened with the rollout there and how that rollout gone since that time, and then also what, in your opinion, and your team's opinion operators in the US Canada should be learning from? how things have gone in Canada?

John Sharpe  2:31  
We'll see. That's a great question. And certainly, it's a very, it's a hot potato, certainly here in Canada. I've talked to many people, many people we're presently engaged with, actually, whether evaluating their facilities or what have you. But you know, one of the fundamental problems I think they had back in 2018, when it was legalized here in Canada. I mean, right off the bat, there's about a $7 billion investment, you know, for a rush the market, there's certainly a tremendous demand you want to legalize, though certainly the producers licensed producers were anticipating trying to meet that demand, will in doing so manufacturer and processing cultivation, etc, was not the issue, they had way more supply than than the demand was there. Because fundamentally, again, Health Canada put a lot of restrictions on dispensaries and getting people up and running. And I think some of the measures and the requirements to open made it prohibitive to even meet the market demand. So it was tough to get out and get rolling. Furthermore, I know a lot of the producers had problems and impediments with packaging has certain packaging requirements or labeling requirements. So all that led to a lot of confusion on the role, though, back in 2018. So therefore, as you're aware of cannabis use, and production is not legal in the United States federally, however, is in various states, I think it's 36. Presidents i'm not mistaken. And essentially, these attitudes and laws reflecting them change. I think the government needs to work cohesively with cultivators and processors and all the packages and even retailers just to define and enforce the playing field and to ensure and to mitigate any problems that we see here in Canada, I think that can be done, I think they'll probably learn from from the Canadian, it was a much smaller market sample here in Canada would be in the US. But I think that would be a key lesson to be learned as they as they roll things out. As it as it goes in the States, quite frankly, just more and more states coming online.

Steve Katz  4:27  
So John, you mentioned before the podcast, how quickly things are moving from a technology standpoint in the industry. Can you talk a little bit about that and what it means for those who've already invested and those who will be investing soon?

John Sharpe  4:42  
Yeah, absolutely. Steve, you know, we're seeing a lot of changes within the industry with technology as you do in a lot of industries, right? It's like a better mousetrap, if you will, but it's also driven by preference, not unlike a Brewmaster or event over there. They have their own preferred means to extract and then case, as far as technology goes with extraction, you have co2, or ethanol, we're even seeing now the introduction of hydro extraction. So things are changing constantly, and people are taking advantage of the new technology. But I think from an evaluation standpoint, where we see here in telco that even like, two, three years ago, when there was a rush to get to market, here in Canada, certainly there's a lot of manufacturers, obviously buying new equipment. And at the time, plus a demand that I think the OEMs to meet that demand were, were charging what I think has been referred to in a jokingly manner as a green tax. And fundamentally, you would pay an exorbitant fee for a say in ethanol extraction unit. And then plus your installation costs, etc, etc. Now, if you look for the same unit or summary unit, it's a fraction of the cost. So it's done two things, there's still it's still good quality equipment, I think, for people getting into the marketplace, now they have a real opportunity to buy used equipment at a fraction of the cost. But if you prefer the new and even the newer technology, it's also come down in price. So it's very important for the consumer on this case, the manufacturer, to understand their options, and when it comes to is a lot of people that do a lot due diligence on cultivation and processing and packaging. And as we've mentioned earlier, regulations that go with that. But certainly from what we're seeing, I think, as the US opens up, US buyers are looking for Canadian surplus, to pick up that equipment. I think an important footnote for the reader and listener of this podcast is it's still not legal in the United States federally, which means you cannot buy a used ethanol extraction or anything. It's cannabis centric, you cannot buy it and ship it legally to United States. So what we're seeing here with the Canadian surplus is it's staying within Canada, or it's going to South America or overseas. So I think it's an important element, certainly with valuation, as you look at surplus equipment on the marketplace, in the cannabis industry. 

Steve Katz  7:13  
Yeah, that really limits the the scope of what you're able to acquire if you're if you're trying to get into the business here. And obviously, from a pricing perspective, that's that's impacted as well. So a very interesting, I think most people probably think about the fact that it's not federally legalized, but they don't think about how that impacts the equipment costs. So as you're talking about this, and the decreasing value of the industry equipment, I'm also wondering about the real estate investment necessary for these types of businesses, both dispensaries and cultivators. And the costs that they have to incur in terms of getting into that real estate, has that generally been a smart bet or not for them?

J  7:58  
Well, it's a great question. I'm speak with my colleagues within the real estate division. Absolutely. I mean, this from a retail perspective, if you're leasing a bansuri in Manhattan versus in Des Moines, Iowa, obviously, those costs are going to be a lot more just by virtue of the rent there. I think from a retailer's perspective, for those people, I think from a cultivation of the manufacturing perspective, also location to the market, like any business, you manufacturing costs, your logistics depending where you are. But one thing some people don't they do this bit of oversight is in when it comes to security, but all these places and there could be a heavy price tag when you're putting on heavy security, whether it's vaults for product or whether it cameras etc. Fencing because that's a large cost that goes into these, a lot of people when they only think about that, but it is it is a very tangible number. So we'll say definitely plays a factor in all this when we evaluate the machinery and equipment, certainly all that comes into play.

Steve Katz  9:06  
Alright, ohn, well, to finish this out today, if I can just go ahead and sum it up briefly on your behalf. It seems like many market participants may likely be finding themselves in a position right now where they need to free up capital to keep pace with fast moving production technology or expansion plans. As a result, it's going to be critical for them to one gain a thorough understanding of equipment liquidation values and the present environment and two know how sale leaseback or other deal structures can also help them unlock value from their own real estate in the shortest possible timeframe. So with all of this in mind, I encourage those of you who are listening in today to reach out to John who can serve as the point person for these integrated services tailored to the cannabis industry and Hilco and for the retail environment overall. So John's email is Jsharpe@hilcoglobal.com that's j as in John S H A R P E at Hilcoglobal.com. JOHN, thanks so much for all your insights today was really interesting for me to hear about it because like everybody else, we're sort of seeing the growth of what's been happening  in our states. And it's, it's fascinating to see how quickly things are taking shape here. And so it's just great having on the podcast with us today.

John Sharpe  10:28  
Absolutely sure. Steven, thank you, it was a pleasure.

Steve Katz  10:32  
And listeners, we hope that today's Hilco Global Smarter Perspective Podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. Until next time for Hilco Global. I'm Steve Katz.

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