Provincial Preview: Newfoundland’s cannabis entrepreneurs temper expectations

(This is the eighth installment in a series looking at the marijuana markets in each of Canada’s provinces and territories. Other installments: Alberta, British ColumbiaManitobaNew BrunswickNova ScotiaOntarioPrince Edward IslandQuebec and Saskatchewan.)

Entrepreneurs are tempering their once sky-high expectations to capitalize on Newfoundland’s regulated cannabis sector.

The province is the only place east of Manitoba where privately owned businesses will be allowed to sell recreational cannabis. But prospective retailers face a major hurdle: They’re restricted to an 8% markup.

Smaller businesses will have a hard time given the strict regulations and high compliance costs, according to Vaughn Hammond, director of the Canadian Federation of Independent Business (CFIB).

“What we’ve done in this province is shut out small business owners. The cannabis industry is going to be run by government and big business,” he said.

Market snapshot

After adult-use legalization is implemented – expected late this summer – one estimate from the Parliamentary Budget Office anticipates annual demand of 12,400 kilograms, when adjusted for Newfoundland’s working-age population. That volume could rise to 13,800 kilograms by 2021.

The report suggests there could be roughly 70,000 consumers after legalization, growing to 76,800 by 2021.

The Parliamentary Budget Office estimates include the illicit and regulated markets.

Estimates from the private sector, however, indicate Newfoundland’s market could be much bigger.

The Marijuana Policy Group – a Denver company that provides analysis and policy advice to private and government clients – told Marijuana Business Daily it sees market demand for recreational cannabis of roughly 20,000 kilograms on an annual basis – 40% higher than the government’s forecast.

Unlike nearby Nova Scotia and New Brunswick, Newfoundland hasn’t seen a rush of medical cannabis registrants.

Newfoundland’s 519 MMJ patient registrations per 100,000 people is among the lowest in the country; Alberta’s 2,543 per 100,000 people is the highest.

Just under 2,750 people were registered to use medical marijuana in Newfoundland in early 2018.

Cultivation

As of May, Newfoundland was the only province in Canada without at least one licensed MMJ producer.

Five applications are in the works:

  • Argentia Gold plans to complete its 80,000 square foot cannabis facility in Placentia, Newfoundland, this fall.
  • Back Home Medical Cannabis aims to have 170,000 square feet of production space in operation in the St. George’s area by the end of 2019.
  • Oceanic Releaf is building a 63,000-square-foot facility in the Burin Peninsula.
  • Canopy Growth has announced plans to complete a 150,000-square-foot production facility by fall 2019.
  • CEPG Consulting and Design (a subsidiary of Snellen Holdings) will apply for a dealer license, which will enable research and development.

Geography and a small local market for recreational cannabis are factors that will limit cultivation opportunities in the province.

Retail

Newfoundland divvied retail licenses into four tiers:

  • Tier 1 licenses include stand-alone cannabis stores.
  • Tier 2 is for stores with an enclosed area for cannabis sales in larger retail spaces.
  • Tier 3 licenses cover dedicated service desks in larger retail spaces that are separate from the main cash counter.
  • Tier 4 licenses are for sales behind a counter, hidden from view (for example, how convenience stores sell tobacco products).

Critics say the retail deck is stacked in favor of large corporations such as Canopy Growth and Loblaw.

“If the profit margin is limited to 8%, then the retailer is only making 80 cents per CA$10 sale. If the sale is CA$7, the margin is only 49 cents for each gram that they sold,” CFIB’s Hammond noted.

The retailer then must pay tax on that slim margin, assuming a profit is made.

“You’ll have to sell a lot of product to cover the expenses,” Hammond added.

That’s why experts say being vertically integrated could be important to any Tier 1 retailer. Those businesses can trim costs from other parts of the supply chain.

Licensees of Tier 2, 3 and 4 shops, meanwhile, will be able to supplement low-margin recreational marijuana with sales of non-cannabis-related products and services.

“The only people that are going to be able to run a stand-alone store in Newfoundland is Canopy or other producers,” said Jason Childs, associate professor of economics at the University of Regina in Saskatchewan. “Small retailers are going to have a problem. That’s the big wrinkle.”

Opportunities

While a lack of large-scale producers and the limited markup on sales could be limiting, opportunities are available to enterprising businesspeople.

Some include:

  • Cannabis-related tourism.
  • Security for pending retailers, wholesalers and cultivators.
  • Transportation for the supply chain.
  • Cannabis accessories in retail outlets.

As with other provinces, Canada’s proposed licensing system will present a number of opportunities for private businesses.

These include:

  • Micro-cultivation licenses for the same activities as standard growers, but on a smaller scale.
  • Nursery licenses to produce seeds and seedlings, including clones, for sale to other licensed producers and researchers.
  • Microprocessing licenses to produce cannabis oil for sale to other LPs and researchers. The same license would also allow for packaging and labeling product sales to the public.

Kickbacks from province

Ontario-based Canopy Growth was the beneficiary of 40 million Canadian dollars ($31 million) in reduced sales remittances to assist in the construction of its production facility.

“It’s not technically a subsidy … it’s almost like an opportunity cost mechanism,” Canopy spokesman Jordan Sinclair said in a previous interview with MJBizDaily. “As we sell product into their provincial distribution system, they would normally take a markup on that.”

The government also put up CA$1 million in funding to develop a research and development program in the province.

Matt Lamers can be reached at [email protected]

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