Canadian legalization of cannabis: hazards and setbacks

It's been less than three months since Canada legalized cannabis on October 17 and the problems are already legion in the Canadian cannabis industry: shortages, complaints against the online system (lack of refunds, delays, poor after-sales service), production delays, regulatory delays for certain provinces, recalled products, withdrawn licenses, excessive prices... Doubts and questions that were raised in the early days of legalization are confirmed today: the current state of the industry is unable to satisfy demand, and is unable to compete with the black market.

The black market captures 50 % of consumers

Since October 17, the government collected data among cannabis users to assess their consumption behavior and overall satisfaction with the current system. Canadians were invited to answer questions using the crowdsourcing from Statistics Canada. The agency then aggregated and analyzed responses from 385 respondents from October 17 to December 31. It found that 52% of respondents bought their cannabis illegally. Of these, 22% did so because of the lack of diversity and quality of legal cannabis, 36% did so because of difficulty of access and 42% because of the high price of legal cannabis.

Because of high prices

Data from Statistics Canada have highlighted a significant increase in the price of cannabis since legalization. The price of legal cannabis averages 9.70$ per gram, compared with 6.51$ on the black market. The price of legal cannabis is far from competitive, and consumers who buy their cannabis legally are buying less. The average quantity of cannabis per purchase and per person is 8.3 grams on the legal market versus 17.2 grams on the black market. Not only do 52% of respondents buy illegally, but twice as much cannabis is purchased this way than legally. For the time being, Canada is a long way from its goal of competing with and eliminating the black market.

The high prices are due in particular to the weight of regulations on the industry, such as packaging constraints. They are also explained by the cost of regulations for the State: «it costs half a million [$CA] a year to enforce the rules and regulations enshrined in the Cannabis Act» explains David Clement of the Consumer Choice Center. This cost is passed on to growers in the form of taxes and administration fees, which in turn are passed on in the selling price. «Taxes and fees create high prices in the beginning, and the lack of competition keeps them from coming down,» adds David Clement.

Because of poor quality

Respondents who said they obtain their supply from the black market because of the lack of quality and diversity of legal cannabis on offer (22%) are also those who consume the most (in terms of grams per month). Although the sample is not necessarily representative, it seems logical that regular consumers are the most critical of the quality of legal cannabis. Some connoisseurs who review legal cannabis, such as the site safebud.wiki detected the presence of insects and mold. Producer RedeCan Pharm had to withdraw more than 25 kilos of products from the Ontario online sales site after a series of complaints from consumers who found insects or mold in their purchases.

For Mark from SafeBud, These reviews help to educate consumers and make them aware that government regulation and high prices are no guarantee of quality. «At the end of the day, is the government doing a better job than the black market, or worse?» asks Mark. «It's important that we have better quality controls. I don't care if the product is late, it has to be safe and the consumer has to get what they paid for. For this kind of price (...) its quality must be guaranteed». Another reviewer recently posted on his twitter a video of his purchase of Casa Blanca, a variety produced by Organigram, filled with seeds. It's inconceivable when you buy a few grams of cannabis at a high price and by legal means to have such a quantity of non-consumable product.

Organigram Casa Blanca pic.twitter.com/pSoznM7ODc

- pancakenap (@pancakenap420) January 9, 2019

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Never-ending shortages

Legal cannabis shortages hit Canada from the very first days of legalization. Initially estimated to last some 12 to 18 months, it would appear that they will last two to three years, while the industry adapts. In any case, this is the opinion of of certain industry executives like Chuck Rifici, CEO of Auxly Cannabis Group: «Personally, I don't think we'll reach a real balance for another three years». This is also the opinion of Greg Engel, CEO of Organigram Holdings and Everett Knight, Vice President for Strategy and Investment at Valens Groworks.

According to Vivien Azer of Cowen & Co, around 50 % of products on sale in five provinces were out of stock in mid-December. Faced with this situation, the Quebec government closed its branches three days a week, Alberta halted the licensing process and Ontario, Canada's most populous province, limited licensing to 25 applicants at first. But the lack of stores is driving some consumers to the black market.

This situation is also affecting the price of cannabis shares on the stock market, which has fallen steadily since legalization. It seems that pre-legalization, Health Canada underestimated demand and producers, losses and delays. On Tuesday, Aurora Cannabis announced that it expected sales of $38 to $42 million for June, i.e. $9 to $13 million less than the expected $51 million. This announcement caused the company's share price to fall by 4.1 %. They are now trading at 5.07$ on the Toronto Stock Exchange.