Why isn’t Canada’s cannabis market thriving? These experts have some ideas

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Image of customers at Four20 in Calgary when legal cannabis sales began in Canada in October 2018

Excitement was rampant at this Four20 store in Calgary when legal cannabis sales began in Canada in October 2018. (Photo by MJBizDaily/Emerald)

Five-plus years after Canada legalized adult-use marijuana, the illicit market still is estimated to account for anywhere from one-quarter to more than half of all cannabis sales in the country, according to a new report from business services company Deloitte Canada.

The report tackled crucial questions such as:

  • What are the gaps between the illicit and legal markets in terms of product offerings, price and operational tactics?
  • Why isn’t Canada’s cannabis market thriving?

To help fill the gaps, Deloitte and its data partner, Neobi, analyzed data from 624 private, legal adult-use marijuana stores and 57 illegal ones.

“The two biggest takeaways for me are price convergence and how brazen the illicit websites are,” Christopher McGrath, Deloitte Canada’s senior manager and author of the report, told MJBizDaily in a phone interview.

Illicit websites offered almost twice as many products as legal competitors did, the analysis also found.

Regulated recreational stores had an average of 538 stock-keeping units per store, while illicit operators had an average SKU count of 918.

The illicit “market has an enormous competitive advantage because they’re not faced with the same regulations, they can flex (adapt) on price easily, their production is simple and cheap and they can use pesticides,” McGrath said.

He suggested the upcoming Cannabis Act review – which is required to be released by the end of March – presents an opportunity to address issues facing the industry.

MJBizDaily asked six experts from across the country to answer the question: Why isn’t Canada’s cannabis market thriving?

Here’s what they said:

Competing LPs don’t pay taxes on time

Beena Goldenberg
CEO, Organigram Holdings

Image of Beena Goldenberg
Beena Goldenberg (Courtesy photo)

“In today’s challenged industry, many LPs are struggling.

“Profitability seems out of reach and, in many cases, these businesses are faced with tough choices: Pay suppliers, pay the bills, pay employees or pay their excise duties.

“For the large number of cannabis companies in arrears, excise duties fall to the bottom of the payables list, and with good reason.

“For several years now, the Canada Revenue Agency (CRA) has not been enforcing excise collection. The problem is that this creates an unfair playing field for those competing in the space.

“Excise duties collected from the provincial wholesalers but not remitted to CRA are being used as a source of funding. In essence, improperly using the Canadian government as a financing vehicle.

“The result is that these LPs now have an advantage over producers who are diligently paying their taxes on time, such as Organigram, as those in arrears are essentially able to use excise payables as cash flow.

“From a tax policy standpoint, applying consistent penalties, payment plans and enforcement when it comes to excise is critical to enabling the industry to consolidate as it should, which will inevitably support a thriving legal market.”

Legal market thrives for those doing it right

Julia Cameron
Vice president of communications, Pure Sunfarms

Vancouver, British Columbia

Image of Julia Cameron
Julia Cameron (Courtesy photo)

“All we hear about are the complexities and challenges we’re up against in cannabis. But let’s ask ourselves: What bright spots are being generated in profitability, performance and productivity? What can we learn about what’s working in Canada’s most exciting emergent industry?

“Those who are seeing success have played it smart. They didn’t just throw money around.

“They executed a measured approach characterized by prudent capital use, careful cash flow, strategic investments and thoughtful product segmentation.

“They leveraged the expertise of operators who’ve navigated tough regulations, economic headwinds and razor-thin margins.

“They’ve maintained a realistic outlook, steering clear of inflated market assumptions and set and met reasonable expectations.

“And they realized they can’t do it alone. They see the power in collaborating, embracing open-door policies with government, regulators and even their competition.

“This is what we need to think about as we work to create thriving businesses in cannabis.”

Regulated cannabis market is half the size it should be

Tamara Lovi
Chief business officer, Rose LifeScience

Board treasurer, Cannabis Council of Canada (C3)

Image of Tamara Lovi
Tamara Lovi (Courtesy photo)

“It’s a matter of expectations.

“About five years ago, before legalization, the assumption was that the ‘legal’ market size would be around CA$10 billion. Investments were made with this assumption.

“The issue is, we are just a little over halfway there.

“Although the legal market continues to grow year-over-year, for those who originally heavily invested with an assumption we would already be at CA$10 billion, their business model is not sustainable.

“Yes, excise tax is eating a disproportionate amount from licensed producers’ profit and loss statements. It should have represented about 10% of gross sales.

“Instead, it is around 30%, (which) doesn’t leave much for LPs to operate, to comply with regulations, to compete with illicit market pricing or to reinvest.

“This has forced LPs to get creative in driving efficiencies to be profitable. Many are barely surviving, leaving room for the illicit market to thrive.

“Excise tax reform is critical to injecting new momentum into the legal market, so it can finally reach its full potential.”

Target the illicit cannabis market

Sherry Boodram
CEO and co-founder, CannDelta


Image of Sherry Boodram
Sherry Boodram (Courtesy photo)

“Why is the illicit market still such a problem when there has been a legal recreational cannabis industry in Canada for almost six years?

“The expectation upon legalization was that government and law enforcement would prioritize eradicating the illicit cannabis sources – including illicit physical stores and online stores – to support their legislative objectives of protecting the health and safety of Canadians and preventing youth from accessing cannabis.

“There is potential for prosperity in a legal market that is supported by favorable governance and a level playing field without the added pressure of illicit competitors.

“It is critical for all governments in collaboration with law enforcement to reassess and reinforce strategies that will allow for a robust legal cannabis industry that is recognized as having significant potential to drive economic growth and innovation across the Canadian economy.

“The longer illegal outlets operate openly before being shut down, the more they contribute to public confusion and blur the lines in public perception about the legality and acceptability of purchasing cannabis from these illegal sources.”

Communicate with marijuana consumers 

Margaret Brodie
CEO, Rubicon Organics

Vancouver, British Columbia

Image of Margaret Brodie
Margaret Brodie (Courtesy photo)

“Beyond the structural difficulties in the system, I believe that the legal market encompasses only approximately half of Canada’s total cannabis market, and this is because consumers are confused.

“This consumer confusion stems from a plethora of in-store purchase options, inconsistency in brand experiences – such as the price-to-quality equation and changing quality from purchase to purchase – and the challenge of discerning whether a purchase is within the legal market or not.

“The simplest explanation lies in the exorbitant pricing driven by excise taxes and regulatory burdens imposed on licensed producers.”

Policymakers lost their sense of urgency

Trina Fraser
Partner, Brazeau Seller Law

Ottawa, Ontario

Image of Trina Fraser
Trina Fraser (Courtesy photo)

“While many criticized Bill C-45 (the Cannabis Act) as being rushed, government maintained that record levels of illicit cannabis use meant we did not have the luxury of time.

“We boldly forged ahead, knowing that refinements would be needed. But we have now lost the sense of urgency that created the Cannabis Act in the first place.

“As industry is pleading for financial and regulatory reforms to preserve the vision of a sustainable regulated cannabis industry, opposition is grounded in demands for evidence that simply doesn’t exist, given the novelty of Canada’s approach.

“This didn’t stop us from passing the Cannabis Act into law, and it shouldn’t stop us from improving it.

“While we shouldn’t be reckless and we should continue to carefully monitor public health outcomes, we cannot allow data gaps to paralyze us from making reasonable, incremental changes that will further displace the illicit market.”

Matt Lamers can be reached at matt.lamers@mjbizdaily.com.