Canadian Cannabis Update: Lots More Cannabis Stores, But Problems Remain

Canadian Cannabis Update: Lots More Cannabis Stores, But Problems Remain
Canadian Cannabis Update: Lots More Cannabis Stores, But Problems Remain
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For cannabis investors who view the glass as half-full, Canada’s legal cannabis industry is finally starting to take shape. This is what was envisioned by investors (and cannabis analysts) when Canada legalized cannabis nationally in October 2018.

Over the first year of legalization, growth in the sector disappointed most observers. While the legal industry tripled in size over this year, even more was expected. The primary reason why the legal cannabis industry didn’t live up to expectations can be summarized in just a few words: not enough cannabis retail stores.

This has been a problem for most Canadian provinces in Year 1 except for Alberta. While other provincial governments stumbled, Alberta has been opening stores quickly and efficiently. Today, Alberta boasts 301 cannabis retail outlets.

At the opposite extreme was Canada’s most populous provinces. Ontario has been the biggest failure in opening cannabis stores. But British Columbia and Quebec have also been significant laggards.

As Year 2 unfolds in Canada, however, the retail picture is looking much stronger. This change for the better can (again) be summed up in just a few words: more cannabis retail stores.

At last, Alberta is no longer alone in working to provide Canadians with reasonable access to legalized cannabis. Just as Canada’s largest provinces were the biggest failures in Year 1 of legalization, these three provinces are currently the biggest hopes as Year 2 commences.

Ontario has just 25 retail cannabis stores at present. But the province has committed itself to licensing an additional 50 cannabis stores, and its “lottery system” for awarding those licenses is well underway.

Quebec has only 22 cannabis stores. The provincial government has announced it will roughly double the number of licensed cannabis stores to 43.

British Columbia is now accelerating with its own cannabis store licensing. The province has 79 licensed cannabis stores today and is opening an additional 77 stores across the province.

With Ontario planning to triple its number of licensed stores and B.C. and Quebec both planning to double the number of licensed stores, this alone has the potential to drive enormous revenue growth in Canada’s cannabis industry.

Saskatchewan also intends to “lift the lid” on its number of licensed cannabis stores, although the government hasn’t released any firm details here.

With Alberta still licensing new cannabis stores at a blistering pace and other provinces (and territories) also busy here, Year 2 is already assured of delivering stronger revenue growth. And monthly sales are now growing consistently at a double-digit pace.

Further bolstering the revenue potential here are the broad array of “Phase 2” cannabis products due to start hitting store shelves in December. This is projected to add roughly 3 million additional consumers for the legal market, translating into roughly a 50% increase of the consumer base.

These new products include cannabis concentrates, edibles, and infused beverages. Not only will such products generally deliver higher margins to cannabis companies, they are more appealing to female cannabis consumers.

These factors all combine to produce a very bullish growth profile for Canada’s cannabis industry. However, plenty of problems remain.

In Ontario, Round 2 of licensing new stores has already produced more gaffes from the province, including a court challenge from several “lottery winners” who were subsequently disqualified from continuing the licensing process. Only roughly 30 candidates are still in the running for new licenses at present.

Quebec has just dealt that province’s legal cannabis industry a serious blow by raising the legal age to purchase cannabis products to 21. This continues a pattern of extremely conservative (paranoid?) regulations from that province toward the legal cannabis industry.

In British Columbia, while the province has opened more stores than Ontario and Quebec combined, cannabis revenues have been a huge disappointment. Statistics Canada data from October 2018 through July 2019 shows B.C. generated just CAD$25 million in cannabis revenues.

This compares to CAD$144 million for Alberta, which has a smaller population. Even Ontario has generated CAD$151 million. On a per capita basis, that’s nearly double the revenues generated in B.C.

Critics have accused some B.C. cannabis retailers of gouging consumers with excessive prices. Whatever the reason for the anemic sales, British Columbia’s cannabis retailers need to do a much better job of attracting cannabis consumers – and dollars.

A more general problem is that local governments continue to be allowed to freeze out the legal cannabis industry through refusing to issue development/business permits. This is more than short-sighted. It is complete idiocy.

Local governments do not have the choice of “banning cannabis” from their jurisdictions. They only have the option of preventing their residents from purchasing legal cannabis products.

Thanks to the folly of cannabis Prohibition, the cannabis black market still controls roughly 85% of cannabis revenues in Canada. This is despite federal and provincial leaders alike asserting that eliminating the black market is one of their top priorities.

One way for provincial governments to deliver on those promises is to mandate the licensing of cannabis businesses by local governments. Obviously, municipal governments would still be able to exercise their normal discretion in deciding who receives licenses for cannabis operations. But simply refusing to license legal cannabis businesses would not be tolerated.

There is now abundant empirical evidence from Colorado and other more mature cannabis markets in the U.S. that legal cannabis businesses have no detrimental impact of any kind, even at the neighborhood level.

Canada’s legal cannabis industry is poised for explosive growth as the second year of full legalization begins to unfold. However, there continues to be enormous potential for additional growth – if the politicians get serious about eradicating the cannabis black market.
Marijuana Investing
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