It's a brave new world for marijuana stocks now that Canada has legalized recreational pot . With the floodgates open for customers, cannabis companies now have to ramp up their production and distribution capacity in order to meet new demand. Investors can expect extremely competitive conditions, and some upstart companies will inevitably fall by the wayside as winners and losers emerge.
Brand awareness will play a key role in helping successful marijuana stocks survive the initial weeding-out process and thrive over the long run. But cannabis companies face a hurdle in their efforts to build out their brands, because Canadian regulations impose plain-packaging and labeling limitations that will restrict their ability to use product packaging for marketing and brand building. Even with those regulations in place, though, some marijuana executives are confident that they'll be able to differentiate themselves from their rivals and win the battle for cannabis supremacy.
Image source: Canopy Growth.
What Health Canada wants from marijuana packaging
In its issuance of proposed regulations earlier this year, Health Canada identified the key purpose of packaging requirements as "ensur[ing] that packaging and labelling are not designed to induce young persons and others to use cannabis." The regulatory agency pointed to evidence that packaging can dramatically affect the way consumers perceive and use products.
Health Canada's regulations include some standard features that every recreational cannabis product will need. A standardized cannabis symbol must appear on every label, along with mandatory health warnings covering six different topics. Cannabis companies must also include information on the packaging about content of tetrahydrocannabinol (THC) and cannabidiol (CBD) found in their products.
In addition, the packaging itself has to meet detailed requirements. Only one brand element beyond the name, such as a logo or slogan, can be included on the package. No other images or graphics are allowed, and the background has to be a single uniform color both inside and out. No fluorescent or metallic colors are permitted, and the font of any brand-related text must be a single color that is in contrast to the background color of the health warning message. No promotional inserts are allowed inside packaging.
Cannabis companies to Health Canada: Go right ahead
Investors who know about the tobacco industry's experience with plain-packaging limitations know how vehemently opposed most cigarette companies are to such regulations. Having spent decades building up brand images and marketing campaigns, they fight hard against any threat to their past investment. Even now, Philip Morris International (NYSE: PM) , British American Tobacco (NYSE: BTI) , and other international players continue to wage battles against numerous national governments that want to impose limits on tobacco packaging.
Yet the attitude among some marijuana company executives about plain packaging is not only less militant but even almost friendly. Canopy Growth (NYSE: CGC) co-founder and co-CEO Bruce Linton, for instance, is quite up front about the ability of his company's Tweed brand to stand up to plain-packaging rules. At a recent conference, Linton couldn't help but take a quick jab at Canadian regulators, explaining that "we almost had to say to them, 'You sure you just don't want us to put it in Ziploc baggies like the criminals?'" But the co-CEO has high hopes for Canopy's ability to lead the budding industry:
We're not protesting really hard about the packaging because we've developed a brand for the last six years by being the first on stock exchanges and taking over the chocolate factory that used to be Hershey for the whole country [of Canada], doing more earned media by multiples than everybody. So we think when people walk in the store, even though the package will have some visibility, they're going to ask questions of the staff, "What's the one from the chocolate factory? What's the one that Snoop [Doggy Dog] liked?" Tweed is going to be front of mind. ... And so Tweed I think is gonna do a fantastic launch because of [this], but it will be very difficult for [other companies] to build brands at point of sale.
Big Tobacco to Health Canada: That's what we want!
In fact, the biggest opposition to plain-packaging rules seems to be coming from tobacco companies, who actually prefer the proposed rules for marijuana and cannabis products to the more onerous regulations for cigarettes and other tobacco products. In a letter in late June, Imperial Tobacco criticized Health Canada for having two completely different proposals for cannabis and tobacco. Unlike for cannabis, tobacco companies wouldn't be allowed to use their logos, pick a packaging format, or make additions of their own color schemes under plain-packaging regulations. Imperial and others might not want plain packaging at all, but they definitely prefer the cannabis guidelines if they're going to have to deal with them.
Some consumer advocates also don't like the cannabis packaging rules. Consumers won't have as much information to help them make informed choices among competing products, and requirements could contribute to contraband cannabis sales on the black market that take advantage of the easily duplicated plain-packaging schemes. As an alternative, they point to what some states in the U.S. allow, with more permissive regulations that tend to limit billboard and media ads while giving more freedom on the packaging front.
Let the race begin
Now that recreational cannabis products are on the market, consumers will have a chance to see how various companies have done their best to produce brand-building packaging under the Health Canada regulations. Investors in marijuana stocks like Canopy Growth hope that their companies' products will build an early following and emerge with the highest market share as floods of new customers make decisions that could result in years' worth of revenue for the retailers they choose.
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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .