It has been a blistering first three years of life for Canada’s legal cannabis industry. Much of the activity was expected – some wild rides on the stock exchange, some sector consolidation, and the launch of secondary products, for example – but other aspects, perhaps chief among them, the resiliency of the illegal market, were not. To reflect on the many changes (and what hasn’t changed but needs to), let’s dive into some viewpoints from across the sector.
Ready to reflect
“A rollercoaster would be the first word that comes to mind,” for Rob Cherry, in describing the last three years. Cherry is VP and general merchandise manager at Fire & Flower, one of the largest cannabis retailers in Canada. “Since the start of legalization, it’s been constant pivoting.”
Cherry explains that on the regulatory side, there have been changing definitions (and interpretation of definitions) for cannabis products to adapt to. He remembers, for example, finding out that accessories, such as flavoured rolling papers, were okay to sell in Ontario-based cannabis stores, but simultaneously, were not permitted in other provinces. He adds that “from an overall market dynamics perspective, there have been changes in supply and demand, which means pricing changes to keep up with.”
There have also been rapid changes in customer preferences for things like different format sizes of various product types. Additionally, “there were few cannabis stores in some provinces, such as Ontario, at the start of legalization,” Cherry says, “and now it’s exploded, which has meant adapting to new competition.”
The entire industry, in his view, “has also been in constant uncertainty about the industry’s future. The biggest question has been if or when the provincial and federal governments will provide the support the industry needs to grow and grow profitably, especially the producers.”
Ready to talk
A time of pent-up enthusiasm to talk about opportunities. That’s the way George Smitherman, president and CEO of the Cannabis Council of Canada, characterizes the last three years.
“Everyone knew we would be in a very static regulatory environment until the Cannabis Act review took place three years in, and now everyone is hungry to talk about change,” he explains. “We’ve had the time, as an industry, to see what has worked and what’s not working.”
In terms of what has gone well, Smitherman points to the creation of an ‘amazing’ consumer experience. “The competitive pricing, the types of products, the presentation of products, and the consumer experience has been a remarkable achievement,” he says. “There has been a lot of innovation.”
While the market size (and consequent overproduction) has caused some consolidation, Smitherman notes that “there have also been some successful ventures into the U.S. and overseas, and also some retreat from investment. Overall, what we can now see clearly is that the global cannabinoid market will be huge, and individual Canadian companies are well-poised. They’ve staked out different global approaches, and ensured that there will be an enduring Canadian presence in the sector.”
For his part, MNP’s Cannabis Niche leader, Glenn Fraser, notes that “globalization may present opportunities for some Canadian cannabis companies and it’s not something that these companies should completely ignore, but the reality is that they don’t have profit in their own backyard. A number of these companies are struggling to build profitable operations domestically, so it’s hard to think that going global is the solution to their challenges.”
Here at home, Smitherman explains that over the last three years, the Canadian public has seen that on a basic level, a legalized industry works. “There were predictions about what legalization would bring to our society and these haven’t come true. But there hasn’t been much progress with eliminating the illegal market.”
During the last 36 months, it’s been able to thrive, he says, because it can access online payment systems like Interac. “And at the same time, some of our members can’t get an operating account with a Canadian bank,” Smitherman reports. “The stigmatization is really hanging in there. I couldn’t get a major Canadian bank to agree to let this association have a small bank account for operation, to handle membership fees and so on. During the last few months, some of our members in Quebec have had a major financial institution tell them they can’t be customers.”
This is in part, he says, because the government hasn’t done enough to show support for and pride in this legal industry. In his view, the industry would be better treated if, by now, the government had expunged all criminal records related to cannabis possession; given the economic development support to legal cannabis, which other similar industries enjoy; and put in place proactive programs to encourage the inclusion of Indigenous people and other groups.
As a result of illegal organizations still taking a big share of industry profits, legal product prices are lower than expected and the excise tax is putting a much larger strain on licensed producers (LPs) than was ever intended. “It needs to change quickly or I think there may be more facility shutdowns,” Smitherman says. “We can handle this by lowering the tax, taking the illicit market, and through economic development support. Furthermore, allowing the export of CBD products would provide a lot of jobs, profit, and industry stability.”
In terms of how much the industry has unified over these common concerns during the last three years, Smitherman notes that it takes any new industry some time for the many interests to align, “but the excise tax has a unifying call, because it doesn’t matter if you are the biggest or the smallest, it still hits you and your customers with a similar wallop.” He believes the months ahead to review the Cannabis Act are going to be critical to show more alignment. He’s also hoping that an annual event in Ottawa, which he is creating, will help; the event will be one “that rallies the whole sector to draw attention to our contribution and our needs.”
Three stages, and beyond
Will Stewart, senior VP at Hill+Knowlton Strategies, divides the first three years of Canada’s legal cannabis industry into three phases. At first, he says everyone wanted to be the first to market, and “the rush to scale wasn’t the best strategy. Some product was substandard, which affected customer perception of the industry. Some companies couldn’t scale.”
The second phase began a year in, during November 2019. It was about starting out smaller and using what had been learned by the entire sector, says Stewart, but this phase was cut short by the start of the pandemic, in March 2020.
The pandemic affected access to physical stores, he notes, but some provinces, such as Ontario, allowed stores to start doing deliveries and/or ‘click and collect’ sales (online orders picked-up curbside). This helped stunt the growth of the illicit market to some extent, says Stewart, and these sales avenues will likely stay in Ontario, but still, the illicit market has grown, especially online. He thinks more consumer education about the differences between legal and illegal products, would be a good idea.
Now that the pandemic is receding, phase three has begun, with the kinks worked out of supply chains and the release of many more new and interesting products.
“We’re now starting to get some stratification, particularly in retail store fronts, with real differentiation and targeting of various markets, such as lower-priced products and products for women,” says Stewart. “It’s good for consumers to see themselves reflected in the market and it’s a positive for the industry. I think that we’ll see individual customers being loyal to a few brands, just like they are with other types of products.”
MNP’s Fraser believes that “if you’re looking to differentiate your retail presence from the other stores, you’ll have to think about carrying a unique or highly-curated product selection or create a shopping experience that attracts the type of consumer that you want to walk through the door,” he says. “All stores may be carrying the same products, but the experience you provide can really be your differentiator and be your driver for long-term survival in the marketplace.”
In Stewart’s view, the opportunities for more health and wellness products have not been realized during the last three years. It’s still not easy to access potential customers in this market.
“There are a lot of barriers to get the high-end customers interested in wellness, to come into a store to see what’s available when they’ve never been in a cannabis store before,” he says. “Canada is also behind on the legislation of CBD products, including allowing the marketing of their health and wellness attributes.”
Noteable industry changes in the last two years Industry layoffs/facility closures
- March 2021: – Canopy Growth laid-off staff in North America, and at its Denmark facility.
- March 2021:- 48North laid-off workers and closed its outdoor grow facility (Good Farm) in Ontario.
- Sept. 2021:- Aurora Cannabis closed its Edmonton facility.
- May 2021: – Hexo Corp. acquired 48North.
- June 2021: – Hexo purchased Zenabis Global.
- – Cannara Biotech bought a TGOD indoor facility.
- Aug. 2021: – Valens acquired craft LP, Citizen Stash.
- Sept. 2021:- Tilray closed its Nanaimo, B.C. facility months after a merger with Aphria.
- Sept. 2021:- TerrAscend acquired Michigan-based Gage Growth Cannabis.
- 2019:– CannTrust has its licences suspended for illegal cultivation.
- December 2020: – Re-entered legal market and started dealing with litigation.
- July 2021:- Three former executives faced charges.