Legalization: Canada's First Year Performance
Updated: Apr 2, 2020
Recent experience in Canada's cannabis industry has been a mixed blessing. While some research firms like Deloitte and Arcview forecast a glorious Cannabis 2.0 era of unprecedented growth over the next five years, others in the media liken the industry's past performance to be a flame-out almost on a par with the dot-com bust. For me, the jury is out.
As the first G-7 country to legalize a national cannabis industry, Canada has been in the unique position to be the global leader. It has achieved a dominant position in international trade, set regulatory policy and production standards, and provided an example for the industry’s rollout in other countries. Canada has also demonstrated its commitment to public health and safety, and, with the exception of a recent warning about American-produced vaporizers, has not experienced any major cannabis-related public safety issues. Health Canada has approached the approval and introduction of new products with care and caution.
Canada’s cannabis sector, however, has not been without its growing pains. In its third annual analysis of the industry, Deloitte warns that while Canada continues to enjoy a leadership position as a first in global terms, its first mover advantage will have a shelf-life. Even as Canada’s cannabis cultivators, processors, testers and retailers continue to have important competitive advantages over their counterparts in more restrictive jurisdictions, competitive gaps, particularly in the US, are closing.
Neil Selfe, Founder and CEO of Infor Financial Group Inc., cites in an interview with Bloomberg that a lack of policy innovation, a messy patchwork of provincial regulations, and severe restrictions on marketing and branding have compromised Canada’s leadership position. He argues that US-based companies are beginning to outpace some of the larger Canadian companies, despite the fact that US companies still operate illegally at the federal level.
Still, Deloitte’s perspective on Canada’s performance to date has been a positive one. “Strong consumer demand for and interest in alternative cannabis products— especially edibles and wellness-related products—suggests that Cannabis 2.0 will, in time, prove to be a strong source of revenue growth for Canada’s cannabis sector. Government and industry players alike have learned lessons from the first phase of legalization in 2018, and there is a shared commitment to delivering an improved rollout with Cannabis 2.0. Momentary stumbles are to be expected as the country nurtures an industry that is just over a year old in its legalized incarnation.”
Deloitte estimates the current Canadian market for legal recreational and medical cannabis to be worth $2.6 billion to $6.13 billion overall. Recreational cannabis accounts for $1.81 billion to $4.34 billion of that potential market, with medical cannabis accounting for $0.77 billion to $1.79 billion.
The rollout of retail distribution networks across the country, has, in general, been less than spectacular. Ontario is a case in point. After dallying with its cannabis program for over a year, Ontario changed its cap on the number of physical retail stores it would allow to be opened from 25 to 75 in July. Ontario alone failed to meet the October 17, 2018 deadline to open retail stores and instead deferred to April 1, 2019. In spite of having 6 more months than the other provinces to prepare, the Ontario failed to manage the lotteries set up to issue retail permits for these stores.
Critics maintained that 75 retail stores were woefully inadequate to serve a population of 14.6 million. The province has now implemented an open application process that will issue twenty licenses per month, beginning April 1st. Critics point out that, by this count, 215 licenses will have been issued at the end of 2020, 455 at the end of 2021, and 695 at the end of 2022. They argue this process will continue to exacerbate a woefully under-served market.
Quebec was also shortsighted, capping its number of stores at 22 to serve a population of 8.8 million. It has since increased this number to 43 by March 31, 2020. In contrast, Alberta has successfully opened 301 retail stores to serve a population of 4.4 million.
Alberta and Saskatchewan have been the most effective in establishing their retail distribution and British Columbia falls somewhere in between. At best, the legalization rollout has been inconsistent and frustrating for consumers.
All the provinces and territories have suffered from a chronic shortage of legal products. This has caused stores across the country to close for days at a time, cut back on regular business hours, or shut down completely. And, of the products consumers can get their hands on, many have been expensive and disappointing. There have been widespread complaints that legal products, including those sold by major producers, are of poor quality. ReDeCan issued a recall of its B.E.C. brand within a month of legalization in November 2018 because of mold. Canna Farms was accused of selling flower a year past its expiry date.
Other prominent companies have sold products found to be inconsistent or tainted. This, along with the fact that legal prices have remained persistently higher than black market prices, does not inspire consumer loyalty. Arcview reports that while British Columbia represents 15.3% of the country’s population, it made up just 3.4 % of Canada’s national legal sales in the first six months of 2019. The black market is thriving.
The regulatory environment has also contributed to shortages. Health Canada has been buried by cultivation, processing, and sales license applications. It entered 2019 with more than 800 applications on its desk, despite implementing aggressive changes to the licensing process. The average cultivation application takes many months to approve and the average sales application takes up to a year. This regulatory red tape has slowed the ability of growers to plant, harvest, process, and sell cannabis.
In addition to this, Health Canada announced on May 8th of last year that, effective immediately, new micro license applicants must demonstrate that they have in place a fully built-out facility as part of their application process. This has severely curtailed the number of new applicants in the cue. Once again, changes in the regulatory environment has frustrated cannabis business and consumers alike.