Cannabis Boom to Bust
How high taxes, competition, and a thriving black market have ultimately led to a failure to launch for Canada’s budding pot industry
Cannabis, also known as marijuana, weed, pot, Mary Jane, bud, dope, Ganga, and the list goes on, was once an illegal drug in Canada used recreationally and medicinally by many for its therapeutic benefits said to ease the pain associated with diseases such as cancer, glaucoma, AIDS, multiple sclerosis, and various mental health conditions like stress and anxiety. Then on October 17, 2018, the Canadian Cannabis Act came into effect, and marijuana became legal for adults 18 years of age and older in all provinces and territories across the country. Many Canadian entrepreneurs had high hopes for the government’s promise of a booming industry with an endless income potential similar to that of the tobacco and spirit industries. Sadly almost five years later, many manufacturers and retail distributors have suffered substantial losses, with many independently owned stores already closing their doors and another nearly one-third of the cannabis stores in Toronto, the largest Canadian city, expected to close within the next year (Robertson, 2022). So what went wrong? Let’s look at the macro environment that has ultimately led the industry and many people’s hopes and dreams to go up in smoke.
The Black Market
According to Stats Canada, before the legalization of marijuana, the black market across Canada for cannabis amounted to approximately 3.8 billion dollars in retail sales (CSCCB, 2020). Some of that came from organized crime groups who were involved in the cannabis market. Organized crime groups selling illicit drugs were one of the components of the trade that the Federal Government had hoped legalization would put out of business. In 2015 the Liberal Government ran on a campaign promise that legalizing cannabis was a means to protect youth from the dangerous criminal black market. When the cannabis act was established, this same Government used three main goals to develop it “keep cannabis out of the hands of youth, keep profits out of the pockets of criminals, and protect public health and safety by allowing adults access to legal cannabis” (Crépault, J.-F., & Jesseman, R. 2022) All of these goals aside from keeping profits out of the hands of criminals has been met. It is not far-fetched for one to believe that illegal cannabis operations generate more profit than legal ones do for reasons such as illegal weed costs about half of the price of legal weed, black market sellers do not pay excise and income tax, they do not have expensive licensing fees, nor are they restricted on the quality of their products or THC levels. It is easy to see why entrepreneurs operating legal establishments would be frustrated with the Government’s failure to act on shutting down illegal operators. Still, one must ask, are they dangerous criminals just because they are not operating legally?
Much of the black market for cannabis in Canada does not fall into the organized crime category, yes some do, but many of the retailers or producers of illegal weed are legacy farmers who have been growing and selling weed for so long that they see a minimal benefit to transitioning and paying the fees to go legit (Passifiume, 2022). Some have tried to take their operations legal but have failed due to the onerous and arbitrary rules put into place by Health Canada (Passifiume, 2022). There is also the fact that most banks will not do business with legally owned and operated cannabis facilities and retailers, let alone illegal ones, so getting the money to turn legit can often be difficult (Ballard, 2021). Of the roughly 1000 legacy farmers in British Columbia, only around 100 have transitioned to legal (Passifiume, 2022). As many of the legacy weed operations have been around long before the legal ones, and since, for most, their only illegal activity is selling marijuana, many of their clients have remained loyal and benefit from the lower prices and familiar quality. As a result of this loyalty, it is difficult for mainstream retailers and producers to sway consumers away. Still, this writer cannot help but wonder if there is not more the Government could be doing to put an end to the black market and put more money into the law-abiding businesses’ pockets instead.
High Costs
Much like with the sale of alcohol and spirits, the Canadian Federal Government gave ownership to the provinces to determine how to regulate and distribute cannabis licenses to retailers and growers across the regions. Ontario chose to operate much the same way as the Liquor Control Board and opened what is now called The Ontario Cannabis Store. Originally The Ontario Cannabis Store (OCS) was supposed to be the sole distributor and retailer of cannabis in the province. The Provincial Government then changed their mind and allowed for private retail sales of marijuana; however, the OCS would remain the sole e-commerce retailer, and private entrepreneurs would operate the brick-and-mortar stores (Wilson, 2021). This was supposed to be a temporary measure to ensure that all Ontarians had access to legal weed while licenses were being distributed and retailer locations were being built (Wilson, 2021). The OCS was and still is the only way to purchase weed online within Ontario legally, which also makes the OCS one of the main competitors to the brick-and-mortar stores. An authorized retailer in Ontario must buy their product from the OCS and display the official cannabis retail seal in their establishment (Ontario.ca, 2022). How can the OCS be both a competitor and the main wholesaler? Is this not a conflict of interest? Would a Government already profiting from the business by way of taxes not want the retailer to be as profitable as possible to encourage small business ownership?
Nevertheless, years later, the OCS continues to be the sole distributor — and the principal supplier — to licensed stores that have had the financial disadvantage of investing heavily in application fees, security systems, store renovations, and overpriced real estate or rent (Wilson, 2021). In February 2023, the OCS announced that to help alleviate some of the challenges for small retailers, they will be reducing their margins from 28% down to 25%; it is expected that this will put $35 million back in the hands of licensed pot companies this fiscal year and $60 million in the 2024 fiscal year (Tara Deschamps, 2023). This is welcome news for many small retailers; hopefully, it is not too little too late.
Competition
Weed retailers and manufacturers are not hard to come by in any Province since legalization began. There are over 1600 weed retailers in Ontario alone; in the small town of Port Hope, Ontario, with a population of only 15,700, there are eight pot shops. For context, Port Hope has only two grocery stores and four gas stations. To say that weeds retail market is saturated is not an over-exaggeration, and unfortunately, the market is like this across much of Canada. So what can individual retailers do to set themselves apart and rise above the competition? Well, with the Cannabis Act restricting advertising and promotion and the type of cannabis products for sale, packaging, and labelling, it leaves very little room for retail to be creative (Crépault, J.-F., & Jesseman, R. 2022). One thing retailers can do is to find a promotional mix that helps to build a brand image for the retail location itself. Use personnel selling to tell the company’s unique story and why it entered the marijuana market (Lamba, 2022). Educate employees to be the subject matter experts on all things cannabis and related to cannabis; this way, they can answer customers’ questions or concerns. Extend the brand to other merchandise and weed paraphernalia such as hoodies, t-shirts, hats, pipes, lighters, and bongs. Use social media and email marketing to offer sales and promotions for weed-related items to help get customers in the location’s door. Unfortunately, without finding creative ways to elevate and distinguish from the over and abundance of retailers in the weed market, many individual stores will find themselves in the one-third expected to close in 2023. (Robertson, 2022).
Conclusion
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One does not have to look very far to see that the Canadian Government’s experimentation with legal weed has failed. Not just because the black market is still around and thriving but because the hopes and dreams of many entrepreneurs have been crushed by debt, stiff competition, and Government bureaucracy. This writer chose to focus on smaller independent retailers for this article and did not even touch on Canada’s two largest weed producers, who, since legalization, have lost a combined amount of 5.4 billion dollars (Olive, 2023). “Today, there are two very different cannabis markets in Canada,” Canopy CEO David Klein said after announcing his company’s latest downsizing, which will cut about 800 jobs (Olive, 2023). “There is one market that’s legal, highly taxed and regulated, and one that’s thriving and illicit.”(Klein, 2023) If Canada’s two largest weed producers are struggling, it is not hard to imagine how a little independent retailer would be as well. It begs to question, though, are there that many weed-smoking, edible-eating, CBD-using consumers in Canada to justify having a legal market? Or was this all just a big scam for investors in the know to get in the market early and then get out before the inevitable downfall? One thing is for sure, as is usually the case; the small little retailer usually suffers in the end.
References
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Ballard, J. (2021, October 12). Cannabis has been legal almost 3 years, yet retailers say banks are shutting them out | CBC news. CBCnews. https://www.cbc.ca/news/canada/british-columbia/cannabis-banks-credit-unions-1.6205932
Deschamps, T. (2023, February 16). Ontario cannabis store reducing price margins to help pot businesses compete. thestar.com. https://www.thestar.com/business/2023/02/16/canadian-press-newsalert-ocs-reduces-price-margins-to-help-pot-shops-compete.html
Passifiumi, B. (2022, October 17). Four years after legalization, illegal cannabis market still thriving … Four years after legalization, illegal cannabis market still thriving in Canada. https://nationalpost.com/cannabis/four-years-after-legalization-illegal-cannabis-market-still-thriving
Passifiumi, B. (2022a, September 28). Red Tape Keeping BC’s “legacy” craft pot farmers out of legal market … Red tape, barriers keeping BC’s “legacy” craft pot farmers out of legal marketplace. https://vancouversun.com/news/local-news/red-tape-keeping-bcs-legacy-craft-pot-farmers-out-of-legal-marketplace
Robertson, B. (2022, September 6). One third of Toronto’s cannabis stores are expected to close within the next year. blogTO. https://www.blogto.com/city/2022/09/one-third-toronto-cannabis-stores-close-within-next-year/
Olive, D. (2023, February 18). Legal pot sales have been a failure in Canada. here’s why. thestar.com. https://www.thestar.com/business/opinion/2023/02/18/legal-pot-sales-have-been-a-failure-in-canada-heres-why.html
Lamba, A. (2022, June 22). How to succeed in Canada’s competitive cannabis retail industry. Cova Dispensary Software. https://www.covasoftware.com/blog/how-to-succeed-in-canadas-competitive-cannabis-retail-industry
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