Read Next Article →

Investment Outlook

In a highly regulated market like marijuana, geographic expansion can be one of the most effective ways for cannabis producers to reduce their risk.

Cannabis producers have lots of risk factors: but one way to lower those risks is to cut their reliance on a single geographic area. That’s especially critical in a highly regulated market like marijuana where different levels of government have a big say in the cultivation and sale of its products.

Geographic diversification can involve marijuana producers ensuring that they have cross-Canada operations. For example, Hexo Corp. (symbol HEXO on Toronto) is a Canadian-based producer and distributor of medical cannabis with production facilities in Quebec. Currently, Hexo’s distribution of medical cannabis is through 134 clinics with which it has agreements. It also sells through its online store. But to cut its risk, Hexo is now expanding across Canada. The company was also among the 31 producers selected by the B.C. government to supply recreational cannabis to the province. It has also now entered into a supply agreement with the Ontario Cannabis Store—run by the provincial government.

Cannabis producers can also branch out internationally to broaden their geographic reach. A good example here is Aphria Inc. (symbol APD on Toronto). The company continues to expand in Latin America and the Caribbean with the proposed acquisition of firms in Colombia, Argentina and Jamaica, and potentially Brazil. Aphria already has investments elsewhere around the globe, including The Kingdom of Lesotho. It was the first African country to introduce licenses for the cultivation, extraction, sale and exportation of cannabis for medical use.

Not all geographic expansion works out—especially when it it’s done through acquisitions, as is mostly the case with cannabis producers. A company can speed up its growth by buying other companies, rather than building on or duplicating its existing operations. But, while acquisitions speed growth, they also accumulate risk. After all, the seller of something always knows more about it than the buyer. When a company focuses on acquiring firms for corporate and geographic growth, it assumes it can out-perform the current management of those firms. It also assumes it can raise the return by a wide enough margin to increase its earnings, over and above the acquisition’s cost.

Sometimes that works out, sometimes it doesn’t. But when acquisitions to increase geographic diversity, for example, do work out, they can help reduce risk, and enhance overall returns.