How to Approach the European Cannabis Market
With the American cannabis industry in full-scale growth mode, many companies are in a mad dash to gain a foothold from coast to coast. The largest also are keeping an eye on nascent opportunities in the international landscape. The big prize there, of course, is Europe — a cannabis market The Insight Partners, expects will be worth $37 billion by 2027, rising at a compound annual growth rate of 30 percent starting in 2020.
That’s the good news. The bad news is Europe is on the slow boat to legalizing weed, and the continent almost certainly will be nearly exclusively a medical market for the near future — and a heavily-regulated one, at that. Of course, that’s nothing new for cannabis companies in the United States. They’re accustomed to exorbitant taxes and regulations no matter in which state they operate (aside from those mavericks in Oklahoma).
Leading the way into the European cannabis market are ancillary, non-plant-touching businesses, which are hawking everything from trim machines to harvesting and extraction equipment and grow lights in hopes of gaining brand recognition and distribution channels before the floodgates open over the next five to ten years. Aside from complex sets of regulations, import restrictions, and other headaches, the most painful part of the process is paying heavy tariffs, duties, and value-added taxes (VAT) that can shrink margins to a few meager percentage points. Although the fees vary depending on where the goods are imported, it’s not uncommon to see them add up to 20 percent or more.
One of the companies making the jump across the pond is Las Vegas-based GreenBroz, which has designed and manufactured some of the most “cutting-edge” harvesting and trim machines on the market. Lance Lambert, vice president of marketing at GreenBroz, has been working on exporting the company’s products to Europe for the past few years and has learned some of the nuances and workarounds along the way.
“Their market, just by population, is double the size of North America, so there is a lot of potential out there,” he said. “But you almost need to bring in an expert who really knows where you want to import it to say, ‘Okay, these guys work really well with their neighbors and have a lower import tax here that will allow us to trade here, and they have good relationships on the VAT side with all the other [European Union] countries.’ There’s just these little things that come up that people just don’t recognize, and they figure they will just ship [their product] overseas like anything else. But there’s a lot more to it.”
When Bruce Linton, then chief executive officer at Canopy Growth Corporation, spoke at SXSW in 2019, he said he was focused solely on the international markets and developing intellectual property and patents that could be duplicated as more cannabis-friendly policies are adopted worldwide. “If I was in the U.S., I would be thinking about what [intellectual property] I could file in any niche areas and which trademarks I can lock up,” he said. “The globalization of this thing… I think in three years it is almost going to be over.”
The challenges of doing business in European countries represent impediments to expansion for many ancillary cannabis businesses, and absorbing the high import fees may be a deal-breaker. Nonetheless, many equipment manufacturers understand cannabis startups abroad want the latest, greatest high-efficiency machines to optimize their operations, and even at slim margins it’s worth the effort to establish distribution channels and a client base as the industry takes shape.
Navigating the ports of entry in places like Luxembourg and the Netherlands is a relatively easy and business-friendly process, Lambert said, but getting the same goods to market in Germany is another story. Rotterdam, the primary EU entry port for goods, is notoriously difficult to deal with, and the Czech Republic also is challenging. As any cannabis entrepreneur knows, though, there are always workarounds and creative solutions to hurdles and roadblocks.
Successfully navigating European markets requires “working with certain departments within the government around what opportunities they have,” Lambert said. “Luckily [for GreenBroz], the topic of tariffs hasn’t been so much trouble as the duties and VAT, because you are bringing in finished goods. Some countries have a stipulation where if it is a totally finished good, then you fall into a different tax bracket. So, that’s a challenge for international expansion if you’re talking about tangible goods.”
Translation: Don’t bake the cake and send it over to sell in a German grocery store. Send over the ingredients for the cake, train some German bakers to follow your recipe, and then set up your distribution channel and retail clients to sell the cakes. “That can save you an exponential amount on the cost of doing business, just coming down to the [cost of goods sold] of getting something over there to Europe and getting it to the local distributors,” Lambert said. “That’s what we’re looking at right now.”
The bottom line for U.S. cannabis companies: Moving into European and other international markets isn’t to be undertaken on a whim. In addition to looking out for their labor force, most European countries also are particular about which companies they allow to import goods.
To overcome local skepticism in the EU, companies that decide to leap across the pond should consider developing socially responsible, sustainable businesses that contribute new jobs and tax revenues to their new communities.
Originally published at https://mgretailer.com/business/finance-acquisitions/how-to-approach-the-european-cannabis-market/ on May 12th, 2021.