The road to legal, recreational cannabis has been an exciting and bumpy ride. Last year, we chronicled the roots of cannabis prohibition1 and the history of medical cannabis2 and how it shaped the grey-market and paved the way for legalization. Now, more than a year after that fateful day in October 2018, we take a look back on what has transpired and what is expected to come as “Cannabis 2.0” takes shape.
The legal cannabis industry in Canada faced many challenges: distribution and supply chain issues, retail development and expansion, and battling with the black and “grey” markets.
Throughout the year, both supply shortages and oversupply issues made headlines in a befuddling fashion. In a publicized tiff3 in July, Michael Armstrong, a Brock University professor, and Bill Blair, the Minister of Border Security and Organized Crime Reduction fired shots at each other. Blair denied supply shortages and cited data that inventories were quadruple that of sales, while Armstrong argued the majority was unfinished and not available for sale.
What was actually happening? Well, it’s murky. Blame is spread between the government and the Licensed Producers (LP)s.
A disjointed patchwork of provincial roll outs from Ontario’s recently scrapped4 and controversial retail lottery, to the problematic shortage of retail locations across the country may not explain the supply shortages felt by consumers, but it did lead to a confusing start for wholesalers and retailers to plan and execute successfully.
Tweed CEO Mark Zekulin said “the inability of the Ontario government to license retail stores right off the bat has resulted in half of the expected market in Canada simply not existing,”5
Some pointed fingers at the government’s onerous regulations as the reason for the shortages.
“…LPs essentially grow cannabis inside of a bank vault, which limits their ability to scale up production and get product to market,”6 remarked a Globe and Mail opinion piece last year in the wake of empty shelves.
In May of 2019, it was reported that Health Canada assured that LPs had grown enough product to meet demand but that logistical bottlenecks were the issue.7
This was around the same time Health Canada announced sweeping new changes to the licensing process for LPs that shook the industry. To ease backlogs in the licensing process, would-be LPs would now require a fully built facility8 that met regulations before applying for a license.
This was a huge hit to those start-ups in the fundraising phase. Before the change, a ‘certificate of readiness’ was a valuable document from Health Canada given to aspiring LPs who had proper plans in place to build facilities. After the change, companies in this phase had nothing to show investors that they could meet regulatory demands until they had a fully built facility, causing an obvious chicken-before-the-egg conundrum.
Confusion about supply and demand wasn’t surprising. Investor cash flowed to the industry based on projections of a burgeoning market, and while demand projections may have been accurate, there was no way to predict how much the legal market could capture from the black market.
No one expected the black market to disappear overnight, but high prices and consumer dissatisfaction with availability, quality, and product selection helped the black and grey markets take a large piece of the pie. Just how large is difficult to determine.
CBC reported a year after legalization that just 29% of consumers9 were purchasing from the legal market based on Stats Canada surveys. At the same time the Financial Post reported that only 14% of the black market10 had been taken by the legal counterpart, based on government data. The middle-of-the-road figure often used is 20%, so an estimated 80% of purchases are still made from the illicit market.
Nearing the end of the year, analysts changed their tune: an oversupply of cannabis 11 was all but assured.
So, Canadians can expect the price of cannabis from licensed retailers to come down, and we are starting to see that now.
Quebec producer Hexo made headlines with prices for an ounce of cannabis equating to five dollars per gram available to Quebec and Ontario markets in Fall 2019.
This may help turn more Canadians to the legal market, but as the chart shows, the black market still offers the best deal. And wholesalers and retailers will feel their margins squeezed until volume increases enough to counteract the declining prices.
Prices are going down. And anecdotally, quality seems to be improving based on browsing weed-focused subreddits. More stores are opening across the country. The last hurdle the legal market had was to be able to offer the same diverse products that the black market offers: mainly, edibles and concentrates.
Cannabis 2.0: Edibles and Concentrates
Amendments to the Cannabis Act12 made edibles and concentrates legal as of October 17, 2019 and marked the beginning of Cannabis 2.0.
Sixty days notice of the intent to sell edibles, extracts, and topicals was required by Health Canada from LPs to serve as a review period, so we didn’t see products hit the shelves, physical or digital, until late December, the 16th being the first day it would be permissible.
The new rules 13 permit 10mg of THC per package of all edible products (this includes beverages) and cannot contain alcohol, nicotine or caffeine, or be branded as an alcoholic-like beverage i.e. “Canna-wine”. This means a package of 5 mints cannot contain more than 10mg of THC in total (or 2mg per mint). Extracts cannot be over 1000mg of THC per container.
As of writing, the BC Cannabis Stores website has 11 products available in the edibles section from Aurora, Tilray, Canopy, and Dosecann. Dosecann dominates the page with 7 of the 11 offerings.
On the concentrates side, there are now a slew of vape pens and cartridges available, but none of the popular consumer concentrates such as shatter, hash, or rosin are available.
Illnesses caused by vaping made headlines in the U.S. during the year, and were reported in Canada also. Cases stemmed from the use of black market cannabis concentrate cartridges used with vapourizers. The Centre for Disease Control and Prevention (CDC) eventually identified Vitamin E Acetate as the “chemical of concern”14 in those illnesses. Anecdotally, it seems black market manufacturers of vape cartridges used the chemical as a shortcut to thicken the product, a sign of its quality amongst consumers.
From a public relations standpoint, it was not the best timing for Canada to be legalizing the products and devices for use with cannabis.
New rules were introduced in the new year, some focusing on Cannabis 2.0:
- BC placed a 20% sales tax on vaping products (increasing PST by 13%)
- Manitoba introduced fines for possession of greater than 30 grams of non-medical cannabis in public, and for possession of cannabis that is not “ packaged, stamped and labelled in accordance with federal legislation”.
- Quebec and Newfoundland & Labrador have outright banned 15 cannabis vaping products
- Quebec’s new regulations16 have also not allowed “sweets, confectionery, dessert, chocolate or any other product attractive to persons under 21 years of age” to be sold.
Increased sales tax on vaping products. Via bccannabisstores.com
In the market and on the streets
Here in Coastal BC, we saw the grey space continue to thrive for much of the year. With only one physical retail location after legalization and a 65% discount17 when comparing legal cannabis to prices on the black market, it was not surprising that the black and grey markets continued to have a strong foothold in the market.
In Victoria, B.C., prominent “grey” dispensaries without provincial licenses continued to operate well into Summer 2019 before being shuttered by authorities. Trees, which had three stores in Victoria and two in Nanaimo, was forced to close in late July and faced fines into the hundreds of thousands and regrettably had to lay off over 150 employees.18 They have remained open selling merchandise, and their website says they are working with regulators to obtain licensing19, and have also opened “Trees Restaurant” with hopes of offering a lounge where people can consume cannabis when and if legislation permits.
On the legal front, $907.8 million20 of legal cannabis was sold in the first 12 months of legalization ($43M21 of that was in the first two weeks). This was disappointing in light of higher projections, but it wasn’t the only upset in the market.
Bloomberg opined that Canada “blew its chance to be the world’s pot leader”22 as the US has seen massive growth in legal states with less restriction on advertising and marketing.
Investors saw big sell-offs in 2019, with average negative yields of -57% 23 for the top ten cannabis companies as of October 9, 2019 and market capitalization shrunk drastically:
Deloitte 24 estimates that the market for edibles and concentrates is $2.7 billion annually, but that there is a lot of work to be done before that market is realized by the legal market.
According to the CBC25, we are seeing a similar roll out to Cannabis 1.0; supply shortages and prices that may not be competitive enough to take the share of the illicit market desired by the government.
Cannabis industry analyst Andrew Udell and CEO of the blog The Cannalysts, outlines the trifecta needed for the legal market to flourish: convenience, price, and selection. As we’ve discussed, price remains a hurdle, but Udell argues that consumers are going to gravitate towards a more regulated product.
As the market matures, a balance will continue to be struck to align the market with consumer expectations. 2020 reckons to be a telling year in the Canadian cannabis industry.
1 METRICS, September 26, 2018, “Legal Weed: Part I – Coming out of prohibition.” getmetrics.ca, https://getmetrics.ca/legal-cannabis/
2 METRICS,. October 24, 2018, “Legal Weed Part II: The End of Prohibition.“ https://getmetrics.ca/coming-out-of-prohibition/
3A Mazur, July 5, 2019, “Canada’s cannabis supply issues are real, despite feds’ denial, says business professor.” Global News.
4 The Canadian Press, November 21, 2019, “Ontario to scrap pot shop lottery system, will open more stores in new year.” CBC. https://www.cbc.ca/news/canada/toronto/ontario-to-scrap-pot-shop-lottery-system-will-open-more-stores-in-new-year-1.5368562
5The Canadian Press, November 15, 2019, “Cannabis CEO says Ontario’s lack of stores is why the company is losing money.” Global News https://www.cbc.ca/news/canada/toronto/ontario-to-scrap-pot-shop-lottery-system-will-open-more-stores-in-new-year-1.5368562
6D Clement.,DECEMBER 26, 2018, “Consumers are paying for government’s failure to understand cannabis”. Opinion in The Globe and Mail. https://www.theglobeandmail.com/business/commentary/article-consumers-are-paying-for-governments-failure-to-understand-cannabis/
7B Kaufmann, May 31, 2019, “Cannabis shortage will turn to glut, says industry expert.” The Calgary Herald. https://calgaryherald.com/cannabis/cannabis-business/cannabis-shortage-will-turn-to-glut-says-industry-expect
8The Canadian Press, May 08, 2019, “Health Canada changes cannabis licensing process in bid to cut wait times.” CBC News.. https://www.cbc.ca/news/business/health-canada-cannabis-licensing-process-1.5128282
9C Tunney, Oct 17, 2019,.”Vibrant’ black market persists as legal pot marks its first full year in Canada.” CBC News. https://www.cbc.ca/news/politics/marijuana-one-year-black-market-1.5320552.
10V Subramaniam, October 15, 2019, Financial Post, “A year in the weeds: Why the cannabis industry didn’t take off the way everyone planned.” . Financial Post. https://business.financialpost.com/cannabis/cannabis-news/cannabis-legalization/a-year-in-the-weeds-why-the-cannabis-industry-didnt-take-off-the-way-everyone-planned
11V Subramaniam, November 6, 2019, Financial Post.“Too much weed: Canadian cannabis producers are sitting on a mountain of inventory, and it’s making some industry watchers nervous.” Financial Post. https://business.financialpost.com/cannabis/too-much-weed-canadian-cannabis-producers-are-sitting-on-a-mountain-of-inventory-and-its-making-some-industry-watchers-nervous
12 Health Canada, June 14, 2019, “Health Canada finalizes regulations for the production and sale of edible cannabis, cannabis extracts and cannabis topicals.” Government of Canada. https://www.canada.ca/en/health-canada/news/2019/06/health-canada-finalizes-regulations-for-the-production-and-sale-of-edible-cannabis-cannabis-extracts-and-cannabis-topicals.html
13 The Canadian Press, October 18, 2019, “Edibles, vapes and oils: What you need to know about cannabis 2.0.” CTV News. https://www.ctvnews.ca/canada/edibles-vapes-and-oils-what-you-need-to-know-about-cannabis-2-0-1.4644511
14 Centres for Disease Control and Prevention.\, December 20, 2019, “Outbreak of Lung Injury Associated with the Use of E-Cigarette, or Vaping, Products,” :. https://www.cdc.gov/tobacco/basic_information/e-cigarettes/severe-lung-disease.html#what-we-know
15 N Saminather, December 4, 2019. Financial Post. “Quebec, Newfoundland & Labrador ban sales of cannabis vapes.” The Financial Post. https://business.financialpost.com/cannabis/cannabis-health/newfoundland-labrador-bans-sales-of-cannabis-vapes
16N Saminather, December 4, 2019. Financial Post, “Quebec, Newfoundland & Labrador ban sales of cannabis vapes.” The Financial Post. https://business.financialpost.com/cannabis/cannabis-health/newfoundland-labrador-bans-sales-of-cannabis-vapes
17 G Korstrom, July 11, 2019, Business in Vancouver (BIV),”Legal cannabis costs 65% more than black-market.” BIV. https://biv.com/article/2019/07/legal-cannabis-costs-65-more-black-market-weed-statistics-canada.
18L Dickson. August 1, 2019, Times Colonist, “Trees Cannabis closes all Victoria stores after another raid.” Times Colonist. https://www.timescolonist.com/news/local/trees-cannabis-closes-all-victoria-stores-after-another-raid-1.23903768
19 Trees Cannabis, December 27, 2019. https://treescannabis.ca/
20D George-Cosh, Dec 11, 2019, BNN Bloomberg, “Pot sales in Canada fall short of forecasts in first year of legalization.” Bloomberg. https://www.bnnbloomberg.ca/pot-sales-in-canada-fall-short-of-forecasts-in-first-year-of-legalization-1.1361025
21The Canadian Press,December 21, 2018, “Canadians bought $43M worth of marijuana in the first 2 weeks after legalization.” CBC News. https://www.cbc.ca/news/business/canada-marijuana-legalization-sales-1.4956402
22 K Owram, June 9, 2019, Bloomberg Business, “Canada ‘Blew’ Its Chance to Be the World’s Pot Leader.” Bloomberg. https://www.bloomberg.com/news/articles/2019-06-09/canada-blew-its-chance-to-be-world-pot-leader-cannabis-weekly
23 V Ferreira, October 9, 2019, The Financial Post, “Feeling burned: The first year of legal cannabis has been a complete disaster for investors.” Financial Post. https://business.financialpost.com/cannabis/cannabis-business/cannabis-investing/feeling-burned-the-first-year-of-legal-cannabis-has-been-a-complete-disaster-for-investors
24 Deloitte. May 31, 2019, “Nurturing new growth. Canada gets ready for Cannabis 2.0.” Deloitte.
25 M McQuigge, Jan 05, 2020, The Canadian Press, “New cannabis products may not eat into black market, experts say.” CBC News. https://www.cbc.ca/news/canada/toronto/ontario-cannabis-products-1.5415668