Cronos Group, a vertically integrated marijuana company, has been doubling down on the cannabis oils space over the last few quarters as it looks to bolster margins and drive greater product differentiation. During Q3 2018, the company saw 29% of its revenue come from cannabis oils, up from levels of around 19% in the previous quarter. Below we take a look at some of the trends driving the company’s push into cannabis oils and what lies ahead.

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Why the oils space is important to cannabis growers

Dried cannabis, which remains the most common cannabis product, is a relatively low-margin business due to a relatively large available supply. Moreover, the dried flower business could become more commoditized in the long run, considering aggressive scale-up of production capacity by major growers in Canada following the country’s legalization of recreational marijuana by adult users. On the other hand, cannabis oils and extracts are priced significantly higher compared to dried cannabis, and their production also calls for significant capital and technology-related investments, as the extraction of cannabis oils is quite complex. Cannabis oils are typically targeted at the medical marijuana market, finding application as pain relievers and anticonvulsants, among other uses. Cronos primarily sells its oils under the Peace Naturals brand, which operates a 2,257 sq. ft extraction lab.

How is Cronos looking to gain a long-term edge?

Cronos is focusing on improving its technologies to gain a long-term edge in the market. The company filed a U.S. patent for a technology that improves its extraction process, reducing the loss of a certain active ingredient of the plant called terpene, improving the effect and aroma of the extracts compared to conventional methods. The company is also exploring more efficient methods of production. Last month, Cronos entered into a partnership with Boston-based biotech startup Ginkgo Bioworks to develop cannabinoids – which are the active ingredients of cannabis plant – using organism design and development technology. If the company is successful, it could produce cannabis oils and other products in a more cost-effective manner, without having to incur heavy capital expenditures to build new cultivation and extraction facilities.