Cannabis companies have broad scope for growth, but there is one major roadblock.

The demand for marijuana is high. Cannabis companies are ready with a variety of products. So what's preventing the legal cannabis market from reaching its full potential? Estimates by Grand View Research show that the global legal marijuana market could be worth $73.6 billion by 2027. And growth is quite evident from the surge in cannabis sales amid the coronavirus pandemic. 

The demand forced Canada and many states in the U.S. to deem cannabis an essential item, and sales have been rising ever since.

For medical patients, cannabis is known to help with various health issues like anxiety, depression, and chronic pain, all of which have become more prevalent during the pandemic. The cannabis industry also offers consumers a variety of products for recreational use and as substitutes for alcohol and tobacco, which aren't considered essential products.

As with any other evolving industry, there are factors at play that hinder growth. Let's take a look at some of them.

What's stopping legal cannabis growth?

Factors thwarting the growth of the cannabis sector both in Canada and the U.S. include regulatory delays, supply issues, a fewer number of legal stores than initially expected, and tax concerns. But perhaps the biggest roadblock is black market sales.

Cannabis is a drug that contains THC (tetrahydrocannabinol), a psychoactive substance that causes a user to feel "high" when it's consumed. This makes it prone to strict regulations. Canada legalized medical cannabis in 2016; recreational cannabis legalization followed in 2018, with the second phase ("Cannabis 2.0," featuring vapes, edibles, and more) in 2019. But that didn't stop the black market from growing.

Consumers of marijuana products, like consumers of everything else, prefer to pay a lesser price if it's easy to do so. The black market makes that possible, and "Cannabis 2.0" derivatives were available on the black market all along, even as Canada took another year to legalize them.

Omar Khan, the national cannabis sector lead at Hill+Knowlton Strategies, stated the following:

The illicit market faces no costs related to regulatory oversight and is intentionally lowballing prices in order to retain market share ... combined with their ability to offer greater product variety and the slow rollout of licensed retail stores across Canada, [this] gives them a competitive edge with respect to the legal market. 

Cannabis companies paid the price

Supply issues stemming from the fewer-than-expected number of legal stores in Canada was one of the major reasons for the downfall of Canadian pot companies last year. Regulatory delays in some provinces were a major hindrance to the growth of the recreational cannabis market after nationwide legalization. The marijuana companies had burdened themselves with overproduction by then, as demand was never the problem. All these factors contributed to the rise of illicit market sales and lowered legal sales.

Once-hot pot stocks Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC), and HEXO (NYSE:HEXO) saw a drastic hit to their revenue numbers, which declined every quarter as losses kept mounting. Aurora Cannabis and HEXO even came close to being delisted from the NYSE. Canopy Growth fared a bit better thanks to its partnership with Constellation Brands, which kept it in a safe spot to survive the crisis. All three are trying hard to recover this year.

In their most recent quarters, Aurora saw a 16% year-over-year increase in revenue to CA$75.5 million, while HEXO saw a 70% rise to CA$22.1 million. Canopy reported a 22% increase, to CA$110 million. 

Shares of Aurora, Canopy, and Hexo have declined 60.7%, 17.8%, and 49% so far this year, while the SPDR S&P 500 ETF is up 4.6%.

Meanwhile, higher taxes in the U.S. and the lack of federal legalization are boosting the black market for cannabis. California, which has the largest legal pot market, is also the largest for black market sales. Estimates by ArcView Market Research and BDS Analytics show that by 2024, legal spending in California could reach $7.2 billion, with illicit spending amounting to $6.4 billion. 

Besides affecting revenue for pot companies, illegal products were also a cause of the vaping crisis in the U.S. Many vape products that turned out to be causing "e-cigarette or vaping product use associated with lung injury," or EVALI, were the result of black-market operators using vitamin E acetate in their products. 

What can bring consumers to legal markets?

It's the responsibility of marijuana users to understand the importance of ensuring that the products they use are legal and safe. It is also imperative that cannabis companies advertise and display their products in a way that gives consumers clear information about safety, quality, and proper usage. And it's the government's responsibility to ease restrictions on the legality of marijuana (and enforce regulations on quality) so that safe pot products can reach consumers easily and efficiently. State-level and federal legalization in the U.S. can further advance the industry.

As these things begin to happen, black market sales should decline and legal sales should start to increase. That will be when we see cannabis companies achieving their full potential.