With hopes for greener grass in Germany vanishing, consolidation is in the cards for cannabis companies

As 2023 comes to an end, it is only natural to reflect on what happened in the markets we cover. But when it comes to cannabis, the answer is “not much,” which won’t help cannabis startups that are already facing a challenging funding environment.

Namely, 2023 wasn’t the year that Germany legalized adult recreational cannabis use. That matters because that’s not what the legal cannabis market once anticipated, and whenever there is misalignment between reality and what investors expected, especially when public companies boosted said expectations, it is rarely good news. Or at least, not for everyone.

“One trend to look out for in 2024 is consolidation,” said cannabis-focused investor Matt Hawkins, a managing principal at specialized VC firm Entourage Effect Capital. “Companies have spent significant capital in preparation for a sizable commercial market in Germany. [As] the chances of that happening fade, companies might not be able to support their operations without joining forces.”

Let’s take a look at what to remember from 2023 and what to expect in 2024, with help from a brand-new global cannabis report from market intelligence firm Prohibition Partners.

What didn’t happen

The expectations that the EU’s most populated country might legalize recreational marijuana didn’t come out of thin air; this possibility was very much on the table ever since a traffic light coalition took power in Germany in December 2021. But this coalition of social democrats, liberals and greens watered down its plans so much since then that one has to wonder how well prepared it was to overcome legal challenges that shouldn’t have come as a surprise.

As Prohibition Partners noted in its latest report, “the regulatory hurdles associated with adult-use​ legalization in a given country are associated not only with national​ regulatory frameworks but also with international treaties and​ laws, such as the 1961 Single Convention on Narcotic Drugs, also​ implemented in EU law, which can make it difficult for countries​ and policymakers to create a legal adult-use market.”

To avoid backlash, Germany had to find a way to loosen its grip on cannabis use without violating international laws and treaties. It didn’t find a miracle route for others to follow; instead, at least for now, it picked a path that is slower and much more narrow in terms of commercial opportunities than companies and investors in the sectors once hoped for.

According to German magazine Der Spiegel, the latest plan calls for:

  • Decriminalization of cannabis.
  • Home cultivation and possession starting April 1, 2024.
  • “Cultivation clubs” that would launch sometime next summer.

As MJBizDaily’s international editor Matt Lamers pointed out, “the draft law still leaves little room for potential profit for publicly traded cannabis companies.” This wouldn’t be a problem if so many of their purported hopes hadn’t rested on that very prospect.

Despite increased legalization of medical and recreational cannabis use, the global legal cannabis market isn’t exactly blooming.

In the U.S, Prohibition Partners found that legal adult-use cannabis sales “began to normalize just above pre-pandemic levels.” Meanwhile, the cannabis industry is reportedly struggling for survival in Canada, where many of the sector’s companies are headquartered and listed. In this context, it was undoubtedly tempting for them to tout the perspective of greener grass in Germany — and no one stopped them.

“For two years, I’ve said Germany wasn’t serious about legalizing cannabis, because their government wasn’t doing the legwork the Canadian government did before we legalized [it]. Some cannabis pubcos [public companies] pumped, pumped, and pumped some more, and the Ontario Securities Commission did and said nothing,” Lamers wrote on X.

It’s hard to tell whether these companies genuinely believe in the market opportunity that Germany would open up, but their projections certainly have little to envy to SPAC decks. And they don’t align with what more objective observers are foreseeing.

“In Europe, existing medical cannabis programs persist, [but] while the slow rollout of adult-use cannabis across the region is important from a symbolic and long-term perspective, it is not expected to see rapid growth,” Prohibition Partners noted.

What could still happen

When it comes to what could happen in Germany, it may be best to envision two scenarios, said Lewis Koski, chief strategy officer at Metrc, a provider of cannabis regulatory technology systems:

“As the coalition government reaches the mid-point of its term, the most optimistic viewpoint has Germany passing its decriminalization bill early in 2024, followed shortly by the introduction of a phase 2 model project bill. A more pessimistic viewpoint sees the decriminalization bill passing early next year, but also sees the clock running out on the coalition’s dream of larger-scale legalization.”

He’s referring to recreational use; medical cannabis is already a reality in Germany. According to Prohibition Partners, Germany represents half of Europe’s medical cannabis market, with 2023 sales of approximately €390 million ($427 million) to over 230,000 patients.

In addition, “Germany stands out as one of the only true medical cannabis markets worldwide, thanks to its reimbursement schemes, in contrast to markets like the U.S. where insurance companies rarely cover medical cannabis costs,” CEO of Berlin-based medical cannabis software company Copeia Garvin Hirt wrote on LinkedIn.

But as Tech.eu noted in an article, “a large pool of companies are competing for the same prescriptions,” making it an “oversaturated market.”

Since several of these companies were simply holding out for recreational users, that Germany isn’t legalizing adult cannabis just yet could perhaps be a good thing for that side of the market — and for patients.

“Although Germany’s decision was undoubtedly unpopular at companies that bet on the legislation going in the opposite direction, this push to slow down the legalization of recreational cannabis is positive for the medical and pharmaceutical market,” Óskare Capital co-founder Oliver Lamb said in our European cannabis investor survey in July.

Lamb was referring to what went wrong with the “hybrid recreational-medical experiment” in North America, and he’s not alone in wishing for clearer lines in the industry. But as dreams of recreational legalization across Europe fail to materialize, 2024 could still be painful for many.

“A key metric for any investment is total addressable market, and Europe’s largest market’s TAM has been limited,” Entourage’s Hawkins said. “This could be a leading indicator for the entire continent to struggle to create a commercial adult-use market in the coming years. In light of this, we are more hesitant to deploy capital in Europe more broadly.”

For Prohibition Partners, the cannabis sector’s specific woes come in addition to a challenging macro context:

There is a clear capital crunch in cannabis, with funding hard to come by for companies involved in the industry. This is not unique to cannabis – rising interest rates, which have tightened money supplies, as well as a shaky economic outlook in the face of rising inflation, cost-of-living crises and post-pandemic recovery, have created a difficult economic environment for companies operating in many industries.

However, in the face of such pressing issues, cannabis reform is often low on the agenda for governments and voters. These factors contribute to the slow pace of progress on the regulatory side, which in turn exacerbates the funding problems for cannabis companies as opportunities for expansion and growth are restricted.

The research firm notes that there are still “multiple significant milestones on the horizon” and we will of course be keeping an eye not just on Germany, but also the Czech Republic, where “expert groups have been busy fleshing out the details of a key cannabis reform bill.” But in the short term for startups in the cannabis sector, what didn’t happen in Germany this year and how their public peers kept on pumping expectations could make for unwelcome additional headwinds.