cannabis market research

The Good, the Bad and the Ugly of the German model of legalisation

An update by the German Health and Agriculture Ministers on the key points of cannabis legalisation has left a bittersweet aftertaste for many cannabis industry stakeholders.  Plans of a nation-wide, fully regulated market announced in October have been watered down to a strong decriminalisation model with home-growing and clubs, to be unfolded immediately, and regional scientific pilot projects to be legislated after the summer.

Table of Contents

Summary of the key points announcement
 
  • Any fines or penalties related to the possession of up to 25gr of cannabis and the cultivation of 3 plants at home will be removed. Cannabis Social Clubs will be allowed to grow and supply up to 500 members with a maximum amount of 50gr a month.
 
  • In the second phase, to be legislated after the summer, scientific pilot projects with a commercial supply chain will be implemented in model regions which could include cities as important as Frankfurt and Berlin.

The Good: Safe access and thriving craft cultivation.

According to epidemiological surveys, over 4.5M adult Germans use cannabis each year in Germany. A strong consumer base that will soon have an easier time accessing products safely: quality controlled under official standards, risking no penalties or fines for possession or use, in a wider variety, through multiple access schemes and in a more favourable cultural environment.

"Commercial pilot projects could provide opportunities at scale to German licensed operators"

The architecture of the commercial pilot projects could mimic the established medical cannabis supply chain, thus providing opportunities at scale to German licensed operators:

  • However, standards other than EU-GMP will apply as adult cannabis will be considered a distinct sector.
  • Service to the existing patient base of medical cannabis may potentially improve through operational efficiencies by companies operating in both markets.
  • However, it could also shift the focus of some players to the recreational market, while others double down on their medical & pharmaceutical positioning.

Additionally, legalisation of home growing, licensing of non-profit clubs and development of a commercial supply chain in selected regions could see a surge of businesses involved in rather small scale cultivation and consumption, such as:

  • Breeders, seed banks and genetic suppliers, particularly as importation of genetics will be allowed.
  • Agri-input, machinery, equipment, packaging, software, technical consultancy and analytical service providers.
  • Accessory brands, device companies and other non-plant-touching businesses.
"Associations and pilot projects have the potential to become the foundation of a fully legalised market"

Newly formed cannabis associations can become nodal points of a community that furthers cannabis advocacy while allowing a significant fraction of cannabis consumers to access products in a fully compliant setting.

  • Despite strict rules prohibiting the outsourcing of cultivation by associations, brands could be allowed to sponsor such clubs to varying degrees.
  • Clubs could possibly be allowed to supply seeds and clones to non-members, becoming centres of knowledge and education of the user population.
  • A hybrid market, for profit and non profit working together, could gradually become more open and integrated over time, setting the foundation of a fully legalised market in Germany.
 

By starting the legal reforms with a strong decriminalisation program, the German government bets on social equity becoming a foundational trait of emerging adult-use markets in Europe: scraping past convictions, allowing private and communal cultivation and putting the individual and collective rights of users at the cornerstone of political reform. 

The Bad: No fully regulated open market in sight.

The dreams of a Canadian-style billion euro market emerging in the powerhouse of Europe over the next few years were evaporated by the announcement of “legalisation light”.

Given the planned scientific study with a duration of 5 years, set to start in 2024 at the soonest, the epiphany of full legalisation, which would not only redeem us of our previous sins, but set the stable framework of an open, licit German cannabis market, is not likely to occur any time soon.

A sustained political consensus through several electoral cycles, and changes to the international narcotic control regime are probably necessary before Germany dares to push further in its legalisation plans, as the traffic-light coalition has argued the stance of the European Comission as the reason to water-down more ambitious plans.

"A Canadian-style liberal cannabis market is not likely to emerge anytime soon in Germany"

The development of a fully regulated associative sector throughout Germany can help fill some of the access gaps left by patchy coverage of legal commercial sales.

However, for clubs to absorb a significant fraction of demand currently covered by the illicit market, thousands of them would need to be set-up throughout Germany. 

Uruguay, with 1/24 of the German population has licensed almost 300 cannabis clubs, with an average of 34 users per association.

"To absorb a significant fraction of illicit demand, thousands of grows and clubs would need to be set up almost from scratch"

The German approach to Cannabis Social Clubs, similar to the one under development in Malta and sometimes refered to as the ‘Spanish model‘ of legalisation, also intends to impose some especially harsh rules compared to the Barcelona-style associations that operate on a legal gray area:

  • Mandatory vertical-integration, with each association growing their own produce or pooling grows with other associations, can promote monopolies in supply,  harming the interests of users and independent players.
  • The membership ceiling set at 500 (a theoretic max of 300kg dispensed each year per club) puts a cap on the scale of operations supplying the associative market, perhaps resulting in high membership fees and the cartelisation of the scheme to a degree.
  • Forbidding on-site consumption is set to restrict the ‘social’ aspect of associations and contribute to making them dispensaries in disguise, contrary to the stated goal of members being ‘as active as possible’ in the clubs.
  • Restricting the membership of German residents to a single club severely limits competition between clubs and removes incentives for innovation: in many cases, black market will be the only supply alternative.

The choice of the Cannabis Social Club model as the bedrock of German cannabis legalisation, while a nice complement to other access schemes, is unlikely to effectively counteract illicit trafficking and might also perpetuate some of the bad practices of legacy cannabis markets. 

The Ugly: Fighting the black market with tied hands?

The limited scale and the (likely) highly bureaucratic and constrained nature of pilot projects will pose problems on the efficacy of said programs to out-compete the illicit market.

Navigating the patchwork of legal cannabis access schemes could become a conundrum for users and businesses alike.

  • Black market resiliency in the first steps of the legal market will be facilitated by the decision to combine nation-wide removal of penalties for small-scale possession and cultivation with the staggered, regional roll-out of pilot projects.
  • The appetite of legacy users to switch to the legal market will be suppressed to a degree by access difficulties and fragmentation of retail channels (pharmacies, dispensaries, associations, CBD shops, growshops…), each with their own niche, forbidden from freely trading with each other or sharing a supply chain
"Too many constraints on legal operators can enable an increase in black market activity"
  • On the demand side, dissociating decriminalisation with the launch of commercial sales could skew the results of the projects in favour of illicit operators:
    • By enabling a hike in demand and in black market activity due to the end of persecution of users, which legal operators will be too held back to absorb, particularly in regions not opting in the pilot project commercial sales.
    • By setting additional restrictions for consumers in order to access their preferred products: purchasing limits (50g/month), complicated processes to enroll, reporting requirements for enrolled users, THC caps for young users, etc.
"Producing enough supply within Germany which is also competitive with illicit cannabis can prove challenging"
  • On the supply side, the exclusion of imported products will require enough production capacity within Germany to be generated almost from scratch:
    • It is yet to be seen how cost-competitive these operations would be vis-à-vis the illicit market, capable of sourcing product internationally without paying taxes or adhering to quality standards.
    • Limitations on the variety of available formats and products (e.g. edibles) as well as strict quality standards could curtail the legal operators’ ability to innovate and compete with the black market.
    • A limit on the nature and amount of points of sale   can further restrain potential legal demand. Only specialist shops are contemplated in the second phase of the German cannabis legalisation model.
The German model of legalisation can prove as an effective way to improve access for a subset of users, or can backfire as a perpetuator of some of the worst practices of prohibition, by not defining an even playing field and postponing the emergence of a transparent, consumer-oriented industry. Still much better than getting your supplies in a dark alley indeed.

A long road ahead for German cannabis

The proposed model of German legalisation has fallen short of expectations of the industry. It is nonetheless a monumental first step in the right direction, which will have ripple effects in the approach to cannabis of other states, and possibly also at the EU and the UN levels.

German industry stakeholders have now a clear lobbying agenda, starting with a wide array of issues not specifically contemplated in the key points, from product standards to the possibility of online deliveries.

Despite the narrow nature of planned legal changes, the licit cannabis sector is poised to experience a boom as the new supply chains are rolled-out in Germany. As observed in other jursidictions, further tweaks of regulations will be critical in ensuring the long term success of the scheme.

Other countries might decide to follow on Germany’s footsteps, as the traffic-light coalition intends to reinforce its efforts in favour of sensible changes to the international drug control regime. Reforms in other EU member states such as the Czech Republic, the Netherlands, Malta and Luxembourg will be probably be informed by the German approach of legalisation, potentially go beyond its constraints and provide inspiration for further attempts in Germany and elsewhere.

 The German approach to legalisation is not the best, but has gotten our foot in the door. Beyond the big headlines and out-of-touch business plans, it is now the time to keep pushing until prohibition is a thing of the past.

Tags :
adult-use,cannabis,Cannabis Social Clubs,Germany,home growing
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