Since Germany’s ‘traffic light coalition’ was voted in late last year, bringing with it the promise of a recreational cannabis market in Europe’s largest economy, a new wave of investment has flooded into the sector.
While the excitement surrounding the opportunity is justified, with the latest figures from Prohibition Partners estimating the German adult use market could be worth €114m by 2026, a number of significant hurdles remain for the German government to overcome before the nascent market can reach its full potential.
Ahead of Cannabis Europa London 2022 BusinessCann spoke to Carlsquare’s Arnold Holle to discuss these opportunities, possible solutions, and whether the Government may have bitten off more than it can chew.
Can you tell us a little about who you are and what work you do at Carlsquare, particularly in relation to the cannabis industry?
I’m German by nationality, and have been an investment banker here in London now for more than 20 years. I was initially with Goldman Sachs and then with UBS, but from day one, I was in their consumer teams working with food companies and OTC drugs.
Obviously that has evolved, and since CBD products came to the market about three or four years ago, I’ve been actively following the sector and had the privilege to act on a number of situations.
We advised CannaCare in Germany on their corporate development activities. They raised money, they did M&A transactions, all this with our help.
Here in the UK we also assisted Blessed, one of the leading direct-to-consumer brands, in seeking a transaction with High Tide, a Canadian listed company.
We’re doing all this in the context of Carlsquare, a business that I founded together with a number of German and Scandinavian partners. We’re now more than 100 people in seven offices, and I head the London branch.
Before we take a look at the future of the German market, I wonder if you could speak to what changes you have already seen since the election last year?
The changes started a few years ago, clearly. The legalisation of cannabis was not a surprise, but a development that’s been advocated for, for many years.
What preceded that was the fantastic growth in the CBD market that we’ve seen in Germany. CBD products are now widely available both in pharmacies, drugstores and online to purchase for consumers. That will be further boosted by the Novel Foods legislation which is going to come in several years.
This is completely separate from the whole discussion around recreational cannabis, which was a programme for the elections and then was firmly announced by the coalition as a programme point to be implemented in the current legislative period, which is going to last until 2026. Therefore it will be possible for the individual voter to hold the coalition to account for the implementation of this legislation.
In terms of valuations of companies, there was obviously a dramatic decline before the year 2021, because the US valuations have all collapsed.
In 2021 and 2022, as deregulation in Germany became a realistic proposal, those valuations have shot up again and we’re now seeing much more bullish views on value expressed by North American players. Interest by these players and financial investors in the German CBD and cannabis sphere has very much increased.
Have you seen this effect only take place in Germany, or are you seeing companies positioning themselves to sell to Germany around the rest of Europe?
Well, Germany is the largest economy in Europe, but other markets in Europe are also experiencing significant legislative changes and deregulation. It’s in that context that financial investors and players from North America are taking a closer look at all the various countries.
I think the most interesting countries are Germany, which is way out front because the potential is so high if you think about the market size for both recreational cannabis and CBD.
It’s then followed by the UK, which is further along the line of deregulation, and will likely take the same step as Germany for deregulation.
When do you think we can expect to see a fully fledged recreational market in Germany, given the ongoing crises in Ukraine and with COVID?
I feel a little bit like this is going to be like a student cramming for an exam. I think that deadline is going to come up and the challenges are so dramatic that it will take four to five years to address them in a legislative package.
I think if you’re expecting something to come to market in the next two years, you’re fooling yourself. The ambition is so generous, the squaring of the circle is nigh impossible.
If you just look at the objectives that the Government has outlined, they want full control from the field to the living room of the consumer, they want to have a price in the store below the black market price, they want to generate significant tax revenues. They say we want to have importation that is in line with the 1961 UN Convention, which prohibits the import of narcotic drugs.
Frankly, I don’t envy the guy who’s drafting that legislation because it’s nigh impossible to square all these objectives.
How do you think Germany is going to get around the 1961 UN Convention?
There are two approaches, one is not to import. If they say ‘okay we’re going to allow domestic production to ramp up’, then someone says ‘well that’s only 20 or 30 tonnes as opposed to the 400 tonnes I need’, the Government can say ‘at least we made a start but it was the 1961 Convention that blocked us.’
The other alternative is to go the route that Switzerland went down which is to say ‘okay we’re trialling this, give us a break’ and apply to the UN for a waiver.
Lots of things have happened in the cannabis sphere in the last hundreds of years that weren’t legal and still happened, and maybe the import of cannabis to Germany is another one.
What are your views on pricing, and what seems like a realistic taxation for you?
Again we have so many objectives that are at odds. If you have an objective to use domestically produced cannabis, which is inherently expensive, you make it even more expensive if you keep the restrictions in place around the production, like safety and security measures that a farmer needs to implement.
They want the tax and they want it to be below the black market price, particularly if it’s very little quantity that’s coming to the market, I think the German government will have to do without the tax revenue for a little while.
There might also be a situation that initially at least the price for legalised cannabis will be way above the market and will only be affordable by a small minority, and the black market will continue until all these issues have been worked through.
I think we’re looking at a timetable there until 2030, something like that. Look at Canada, for example, there’s still a black market out there. The black market won’t disappear overnight.
How important is it for Germany to get this right in order for other countries to consider a similar route?
If we look five years back, we would have always said that Holland was the model of how to do this. I don’t think you need to be the largest economy to do it right.
The voter has propelled into office a set of parties that have made legislative change their mantra, and therefore, Germany finds itself in this position now.
I think what’s first going to happen is that other voters and other countries and other parties will pick up this chant and and ask for deregulation as well, and that might well proceed even the implementation of legislation in Germany, because, as I said, I think the coalition has set the bar so high.
By the end of the legislative period (2026), I think the answer will be that we’ll have a trickle of supply that will be legal and the Germans will say, ‘we’ve implemented something, it’s beautiful, but it’s only covering 0.1% of demand’.
Over time it will grow to cover more, but I just don’t see a solution where we’re going to be sitting here five years from now and can say that the black market in Germany has disappeared, it’s going to take much, much longer.
With so many obstacles to overcome in such a short time, what real opportunities are there for cannabis businesses?
I think the opportunity is evident, it’s the rollout of an entirely new retail phenomenon. When hifi systems came out, or PCs came out, or mobile phones in the 90’s entire chains of retailers were developed that address that need.
And I think the same thing will happen with cannabis, we’ll have three or four nationwide chains that will allow consumers to buy cannabis from experts in a controlled setting in line with the government regulation. I think these will spring up once the legislation is in place.
What role do you think these businesses will play in informing regulation and shaping the market?
I think as ever, the various constituents are making their voices heard already today. So you see the big CBD and cannabis players making recommendations to the government about how this could be implemented. You see the big farmers, you see the importers, everybody is making their voices heard.
Now, you have the gorilla in the room however, the big pharmacies. You have almost 20,000 pharmacies in Germany, and that’s a very strong lobby group with severe economic and political impact, and I’m sure when they say something that their voices will be heard over and above those of the cannabis lobby.
Initially, they’ve said that they are prepared to host cannabis distribution in their outlets, despite the novelty of having a product on their shelves which is not helpful to health on the face of it.
There were some objections to that initially, but I think now the interest of the public to have a controlled distribution even before these retail chains are developed, takes precedence.
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