Full financial effect of Canada’s recreational marijuana ‘soft launch’ may be years away

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Canada recreational marijuana, Full financial effect of Canada’s recreational marijuana ‘soft launch’ may be years away

When Canada becomes the first Group of Seven country to legalize recreational cannabis on Wednesday, market observers say it will amount to a “soft launch,” with the full financial effect of this multibillion-dollar industry still years from being realized.

The early months will be marked by a small number of stores, limited product selection and inevitable cannabis shortages – and that’s just fine, say executives.

Terry Lake, vice president of Quebec-based licensed producer Hexo and former British Columbia health minister, expects the market to take another three to five years to mature.

“The legal market is not going to be fully formed right out of the gate,” he said. “The first six months will see the rollout of some retail opportunities, which will rise. A year from now, the consumables will come into play.”

Lake cited Colorado and Washington state, which went through similar growing pains, as examples.

Senator Tony Dean, who played an instrumental role getting the Cannabis Act through the Senate, expects the first few months to be marked by provinces ironing out wrinkles in new regulations.

“The impact is going to be counted in years more than in months,” he said.

“Then, over the next two to three years, we will be able to start looking at how consumption patterns are changing, who’s using cannabis, how they’re using it, and the shift away from smoking to ingestibles and vaporization.”

Retail opportunities

Only 85 physical stores will open to sell recreational cannabis on the first day of legalization – Oct. 17 – about 30% of the 288 outlets Statistics Canada expects by the end of the year.

Darren Bondar, CEO of Alberta-based Inner Spirit Holdings, which plans to open recreational cannabis shops across Canada, isn’t worried about the slow start.

“It’s a great starting point for the industry, and entrepreneurs can take a breath and unroll their retail strategies in a systematic and balanced approach,” he said.

“We have 21 stores currently under construction with another 25 in Western Canada in the pipeline. Ontario is now in full swing, as we have received over 500 franchise applications, have granted our first 13 franchises and plan on opening additional corporate stores right across the country.”

Industry sources expect the number of physical stores to exceed 1,000 by the end of 2019.

Ontario’s first brick-and-mortar stores won’t open until spring while British Columbia is starting with a single store and Alberta with just over a dozen.

Licensed production

Canada’s licensed producers have neither the supply nor the diversity of products to put a serious dent in the illicit market right off the bat, but that does not come as a surprise to anyone.

Canada’s licensed cannabis production doubled to 80,500 kilograms (177,472 pounds) by the end of 2017 from the previous year. But that’s about half of what is expected to be produced by the end of 2018 and only around 10% of what will be needed to entirely displace the illicit market – years down the road.

“While the legalization of recreational cannabis is a significant milestone, Oct. 17 is just a date,” said Daniel Goldberg, co-founder of Ontario-based Good & Green, which plans to cultivate more than 40,000 kilograms of dried cannabis in 2019.

“Production is being significantly increased as existing producers expand and new producers enter the market. Good & Green, for example, which recently received its cultivation license, is well positioned to disrupt the Canadian cannabis market through its 100-acre outdoor farm.”

The Cannabis Regulations allow standard cultivation license holders to grow cannabis outdoors. However, no outdoor-grown cannabis will be part of the national inventory until at least mid-2019.

A report on Canada’s legal marijuana industry by CIBC – the country’s fourth-largest bank – estimated the legal market will involve 800,000 kilograms by 2020.

And a report commissioned by Health Canada from Denver-based Marijuana Policy Group cited Canadian demand for marijuana flower equivalent at more than 900,000 kilograms.

Edibles ‘the future of cannabis’

Products infused with cannabis will eventually make up at least one-fifth of all cannabis sales, but these goods will not be part of the legal market on Oct. 17.

“Health Canada is working diligently to develop the necessary regulations to address the production and sale of edibles – cannabis products that can be eaten or consumed as a beverage – so that they can be in place within one year following the coming into force of the Cannabis Act on Oct. 17, 2018,” a Health Canada spokesperson said.

Canada’s licensed producers are not waiting.

Some are already deploying millions of dollars – not on mass-scale cultivation, but in preparation to tap the market for infused products.

“If we look south of the border, in (U.S.) states where recreational cannabis is legal, consumer demand has dramatically shifted away from raw cannabis in favor of innovative, convenient and smoke-free options,” said Nick Dean, CEO of Emblem, a licensed producer in Ontario.

If not now, when?

Regulators will have a lot of say about how long it takes to convert illicit market sales to the regulated market.

“The biggest question in my mind is what Health Canada does with security clearances. Are they going to approve people that have had previous convictions, and how are they going to measure that?” noted Deepak Anand, vice president of Toronto consultancy Cannabis Compliance.

“Anyone with issues previously, even minor possession offences, have seen significant delays in clearances,” he continued. “If the yardstick is going to be the same to measure new people coming online, it’s going to take us a while before we start to transition that market.”

Anne McLellan, who chaired Canada’s nine-member Marijuana Legalization Task Force, said it will take years before the  regulated market for marijuana fully overtakes the multibillion-dollar illicit market.

“It will take some time to normalize the market and have the supply curve and demand curve meet in the legal market. And nobody should be surprised by that,” she told Marijuana Business Daily.

“I would like to see 80% of the illegal cannabis trade gone within 10 years,” she said.

Matt Lamers can be reached at mattl@mjbizdaily.com

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