Ontario Government Continues To Bungle Cannabis Legalization

Ontario Government Continues To Bungle Cannabis Legalization
Ontario Government Continues To Bungle Cannabis Legalization
legal cannabis (cover) by N/A is licensed under Adobe Stock

What’s the nicest thing that can be said about the Ontario government’s efforts to legalize cannabis? It’s been “consistent” – consistently incompetent with respect to every aspect of cannabis legalization. A recent article from The Star sums up the latest chapter of this litany of failure.
OCS, also called the Ontario Cannabis Retail Corp., is a provincial crown corporation under the Ministry of Finance. It holds a legal monopoly on online recreational cannabis sales in Ontario. It’s also the sole supplier to privately owned cannabis stores.

But despite its public ownership and public mandate, OCS runs very privately. Since January, it has posted just four announcements on its news web page. And it has said almost nothing about its sales performance since legalization began. Reporters complain it’s a black hole from which no information escapes.

For newer readers, let’s backtrack a bit.

Ontario was the slowest province in opening up legal cannabis stores. It took Ontario nearly six months to open its first cannabis store, despite representing Canada’s largest province (population 14+ million).

This meant that Ontario residents could only purchase legal cannabis online. Cannabis sales only delivered a trickle of revenues from this huge population base.

In the first month that retail cannabis stores began to open (and with just “a handful stores”), total sales of legal cannabis more than doubled in Ontario, from >CAD$8 million to $19.6 million.

Part of the reason for this explosion in Ontario retail sales is that cannabis consumers prefer to shop in person for cannabis products. But part of this is simply the terrible job that Ontario has done with online sales of recreational cannabis.
…consider pricing. When retailing, OCS apparently charges consumers roughly double what it pays producers. That’s comparable to the LCBO and other provinces’ liquor agencies, which generate cash for government treasuries. But is it appropriate for cannabis?

Look at Quebec, which marks-up products only 23 per cent. Its average prices are below $8 per gram, versus above $10 in Ontario. That makes Quebec’s agency less profitable but more competitive with black markets. Should OCS follow suit? Who’s making that decision?

The Seed Investor has already addressed the issue of cannabis pricing/taxation with an in-depth look at the policy arguments here. As has been demonstrated in the United States, low cannabis taxes are the only way that states/provinces can successfully phase-out the cannabis black market.

Colorado has proven this.

Ontario’s retail pricing of legal cannabis is a recipe for long-term failure. The province isn’t doing any better in terms of the private cannabis stores it is licensing, where it is the exclusive wholesale supplier.
As for wholesaling, OCS claims to offer “transparent” pricing to private stores. But it doesn’t disclose what that means.

That adds risk for would-be cannabis retailers. To enter the license lottery, they must have a store site, a $50,000 letter of credit, and $250,000 to invest. But they can’t learn about OCS’s wholesale prices, and hence do proper business planning, until after they win.

A black hole. Not the way that responsible governments conduct business.

The only good news here for Canadian cannabis companies and cannabis investors is that it’s impossible for Ontario to do any worse. Things can only get better and virtually any change from the status quo would represent an improvement.

Ontario has already announced that it is handing out another 50 cannabis store licenses. That will more than triple retail storefronts in the province. Even with its (current) excessive cannabis prices, that will translate into a commensurate increase in legal retail sales.

But there is so much more potential for legal cannabis in Ontario.

Hopefully, Ontario’s current provincial government will learn (quickly) from its repeated failures with respect to legalizing cannabis. Otherwise cannabis companies and investors must look for change from voters – voting in a more competent, industry-friendly government.

The overall message in Canadian cannabis today is explosive growth in retail cannabis sales: three consecutive months of double-digit sales growth. However, with over 70% of recreational cannabis sales in Canada still expected to go to the black market in 2019, there is so much more revenue/growth potential to tap here.

Much of that untapped commercial potential is in Ontario. Hopefully Ontario’s “free enterprise” government is listening.
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