Ontario expects farm-gate cannabis to launch post-pandemic; craft framework in works

(This story has been updated to clarify the Ontario Cannabis Store’s role as a wholesaler of adult-use cannabis.)

Ontario’s cannabis wholesaler is working with some producers to launch on-site stores at their facilities after the COVID-19 pandemic eases, and guidelines are in the works to apply to craft marijuana businesses.

That was just some of the valuable information from a recent “ask me anything” (AMA) on Reddit with Ontario Cannabis Store Chief Commercial Officer Cheri Mara.

Marijuana Business Daily asked experts to weigh in on eight pieces of information that are of interest to businesses:

1. OCS framework for craft cannabis

Ontario Cannabis Store’s Peter Shearer is drafting a framework for craft cannabis.

“This framework will start with a clear definition of what craft means for the Ontario market,” Mara said in the AMA. “And this definition is going to go beyond just marketing and actually reflect into the roots of craft cannabis growing in the legacy market.

“Once the framework is finalized – it will allow us to be clear with any licensed producer, large or small, about what it means if you want to bring a craft branded product forward.”

The OCS will look for feedback when the framework is complete.

Takeaway from Mark Spear, CEO of Ottawa-area Wildfire Collective:

“The recognition from Canada’s largest cannabis distributor that craft products are substantially different from the factory-farmed options that currently dominate the shelves is a significant development. Consumers are highly discerning in Canada and know what good cannabis is and what it should cost.

“The legacy market largely consists of small, craft producers that have honed their skills over many years, so this is a critical point for those aspiring to transition into the legal market. With limited marketing and branding options, a craft designation could give those who put in the extra time and effort a distinct advantage.

“How the OCS will define craft is the question that remains, but it appears they are taking this exercise seriously and have some of the industry’s top minds working on it.”

2. Opportunities for seed and clone producers

Mara said seed selection is set to improve, and the OCS aims to sell clones next spring.

“Seeds have been very tough to source. We are open to sourcing seeds from any licensed producer willing to bring them to market,” she said.

“This spring, our seed selection will be better, to start, we’re adding six additional seed products from ANC Cannabis based out of Alberta, and more in the weeks ahead.”

ANC Cannabis is a micro-class license holder in Alberta.

“Until we can do it really well and make sure they survive the journey, we will not offer clones,” Mara said. “We hope to have a solution for clones in time for next year’s growing season.”

Takeaway from David Hyde, CEO, Hyde Advisory & Investments in Toronto:

“As a longtime cannabis industry consultant, I’ve seen considerable increased attention toward genetics from Health Canada and from federal license holders. I expect to see a broad and diverse selection of seeds and clones sourced from consistent providers post-COVID-19. There are solutions out there now for transportation of clones so I don’t see this as a barrier.”

3. Old inventory

Mara acknowledged that dried flower is not the best experience for consumers.

“Most recently, we changed our policy to ensure that all products producers ship to us are packaged within the last three months – this may take some time to be visible to customers as we sell through inventory.”

Takeaway from Matt Maurer, co-chair, cannabis law group, Torkin Manes, Toronto:

“The devil is in the details. If the date is calculated from the date of packaging vs. the date of harvest, I question how feasible it is for some LPs to simply repackage old product. If that ends up not being possible, either from a cost or regulatory perspective, it could spell trouble for some LPs and could also result in processors being able to purchase dried flower input at lower prices than we are currently seeing.”

4. Lower retail prices

The OCS has lowered prices on more than 240 products since January. Price per gram is 25% lower, on average, and margins are shrinking.

“We know more prices will decrease in the future with more efficiency being achieved in the marketplace,” Mara said.

“At the same time, quality is something that needs to continue to improve, particularly on products at higher price points.”

Takeaway by Michael Armstrong, Brock University business professor:

“This confirms my past argument that most cannabis producers and retailers need to be efficient enough to earn profits even with cannabis retailing at black-market prices of around CA$5 per gram ($3.50), taxes included.

“Some craft and premium products can sell at $10 and much higher, but those will be the exceptions, not the average. Retailers need to realize they cannot all be high-end Apple Store clones. Producers need to consider approaches like lean manufacturing, automation and outdoor growing; or, focus on higher-margin products like edibles and topicals.”

5. Beverages now available

The OCS website started selling cannabis-infused beverages this week.

“As 2020 progresses, there is going to be a lot more ready-to-drink beverages that our licensed producer partners bring forward,” Mara wrote in the AMA.

Takeaway from Terence Donnelly, CEO of Hill Street Beverage, Toronto:

“Beverages probably have the greatest opportunity for consumers to come into the category. There’s a lot of people not interested in smoking at all. We hope the OCS allows pricing to evolve. Instead of telling us what the price is going to be, which is what they did in the past. We establish pricing strategy and they should respect it.”

6. No takers for direct wholesale

Mara said the OCS offered federally licensed producers the opportunity to have a hybrid approach, where producers could take on direct-to-store distribution if they could meet or surpass OCS performance levels.

“However, no producers opted for this,” she said. “We are in the process of continuing to expand our privately operated distribution network to stay ahead of the many more stores that will be licensed in the near future.”

Takeaway by Michael Armstrong, Brock University business professor:

“Short term, industry needs to live with OCS being the middleman in the cannabis supply chain for the foreseeable future, so make the best of it. Try to work with it on measures like data sharing to improve marketing effectiveness and cross-docking to improve operational efficiency.

“Long term: Once retail chains get established in Ontario, even with just 75 stores each, retailers and producers will have much more interest in bypassing OCS. Bigger firms should develop contingency plans for how this would work and begin lobbying the Ontario government to make it happen. Meanwhile, they might also discourage OCS from adding more warehouses or other long-term overhead. Quebec’s SQDC (Société québécoise du cannabis) does not own any warehouses: It arranges shipments directly from producers to all its stores.”

7. Farm-gate sales post-COVID

There has been interest in producers selling cannabis directly to consumers at their facilities – called farm-gate.

“There are a handful of producers that have submitted applications to open farm-gate stores, and we are starting to work with them to prepare for their launch post-COVID 19,” Mara said.

Takeaway from David Hyde, CEO, Hyde Advisory & Investments:

“I see farm-gate being an excellent opportunity for micro-class license holders to diversify their businesses. The larger license holders will likely come out of the gate first, but history shows that opportunities will be in play for smaller, craft producers to enter this space with a unique value proposition.”

8. No undercutting stores

Mara said the OCS, as a wholesaler, does not undercut stores.

“Stores are not our competition but our partners in growing the size of the legal market. We designed our pricing to eliminate the risk of undercutting stores. All stores buy cannabis from us at a fixed markdown from OCS.ca prices,” she said.

“If we raise or lower prices on OCS.ca – stores always receive the same consistent markdown. In stores, each retailer can set the price of products as they wish – and some set prices higher than OCS.ca to reflect the education and/or experience they provide inside stores, while others price lower.”

Takeaway from Matt Maurer, co-chair, cannabis law group, Torkin Manes:

“This confirmation will be welcomed by many. There have been lots of questions about the relationship between the OCS and the physical retail stores, including pricing and product availability – specifically who gets first crack at high-demand product, of which there is limited inventory. Many view the OCS as competition to the physical retail stores, and in some ways it is. But it is noteworthy that the OCS views itself as a partner, not a competitor to the physical stores. That mentality benefits all stakeholders.”

Some feedback was edited for length and clarity.

For more of Marijuana Business Daily’s ongoing coverage of the coronavirus pandemic and its effects on the cannabis industry, click here.

Matt Lamers is Marijuana Business Daily’s international editor, based near Toronto. He can be reached at mattl@mjbizdaily.com.