Deloitte’s study titled “Clearing the Smoke: Insights into Canada’s illicit cannabis market,” pulls together statistics to help detect key findings that the regulated market might employ to leverage tactics and decision-making.
Together with Neobi, Deloitte’s cannabis data partner, the study highlights challenges arising from unregulated vendors. By analyzing gaps in pricing, product diversity and operational practices between the two markets, the study identifies opportunities for potential improvement and strategic intervention.
GO: What motivated Deloitte to undertake a study on this aspect of the cannabis industry?
CM: The primary motivation was a real lack of hard data about the illicit cannabis market in Canada. Additionally, it coincided with the Health Canada Cannabis Act Review and we thought it would be a pertinent issue for both regulators and legal cannabis companies.
GO: Describe the process of collaborating with Neobi.
CM: Neobi was our data partner for this study – they built a special-purpose data collection tool based on their current data analytics platform, which tracks inventory at legal cannabis stores. They were able to re-purpose this tool to track for illicit online stores for the purposes of the study. Additionally, they provided insights and qualitative data points we included in the study.
GO: Why didn’t you approach government-owned recreational cannabis stores for this study?
CM: In many jurisdictions, government-operated cannabis stores may be subject to regulatory pricing controls. This means the government sets prices to achieve specific policy objectives, such as discouraging excessive consumption or minimizing the illicit market. Comparing prices in government stores to those in private retailers might not reflect true market dynamics, as private retailers may have more flexibility in setting their prices. Government stores may adopt a uniform pricing strategy for cannabis products, regardless of variations in local demand or production costs. Private retailers, on the other hand, may respond to local market conditions, leading to more diverse pricing structures. Excluding government stores allows for a more accurate assessment of how market forces influence product costs.
GO: How would you define key characteristics of the illicit market in Canada?
CM: The primary characteristic of the illicit market is its opaqueness. It’s very difficult to gain insights into the market given its illegality. [Other characteristics include] lack of regulations and quality standards, which means illicit producers can operate with a much lower cost structure when compared to legal players.
From the perspective of illicit cannabis users, accessibility and convenience is a key characteristic with distribution channels ranging from online stores, physical stores, and individual dealer networks – which is much more robust when compared to the legal market which is limited to licensed retail stores and select online retailers (largely provincial-run). [Finally,] the illicit user base also tends to be predominantly older legacy users with a strong preference for flower and extract products.
GO: What were the most surprising findings or trends?
CM: The relative convergence of pricing for dry flower between the legal and illicit market was most surprising. Prior to conducting this study, I had assumed the illicit market significantly undercut the legal market in terms of pricing – which is really not the case. The pricing competition in the legal market has brought prices down significantly.
The SKU count and wide distribution of available cannabis products in illicit online stores (1.7x that of legal stores) was also quite surprising. These illicit online retailers seem to have access to a robust illicit production and distribution network providing access to a wide variety of products. And the shipping methods utilized by the illicit online stores was also surprising – most noted explicitly on their website that they use Canada Post and ship with standard mailers. None of the illicit online stores reviewed seemed to go through any efforts to conceal the nature of the products they were shipping, which often also included illicit narcotics such as psilocybin mushrooms, DMT and LSD.
GO: List the levers that licensed producers and regulators have at their disposal to combat the illicit market.
The most significant lever for both would be education – educating cannabis users about the potential dangers of illicit cannabis products (e.g. use of pesticides, no quality control requirements, no testing requirements). The government at multiple levels and through multiple government agencies can pursue enforcement against illicit retailers and producers – via illegal retail, illegal online stores, mailing, banking, etc.
Legal cannabis companies can also seek insights into the illicit market in order to identify weaknesses or gaps in offerings that can be exploited. Part of the reason for selecting this topic for study and partnering with Neobi was to develop a starting point where actionable illicit market insights could be provided to legal players.
GO: Would you agree another potential method to help extinguish the legacy market might be to reduce gatekeeping and fees into the legal market and encourage illicit players to join?
CM: I would temper that point by noting existing excess capacity within the legal market. While we don’t view it as feasible for illicit operations / capacity to be brought into the legal market, the human capital of the illicit market would be invaluable given that the legal market has struggled on the technical side in terms of cultivation, genetics, strain variety, etc. and insights could be provided on how to appeal to / attract illicit market users.
GO: What are some ways consumer behaviour can be swayed to increase purchasing habits from the regulated market?
CM: As noted previously, education regarding the illicit market is key. Highlighting to cannabis users the potential dangers of illicit cannabis products, lack of any QA or testing on cannabis products, criminal penalties and presence of a criminal element in the illicit market should all give consumers pause and make them re-assess purchasing from the illicit market.
GO: What are main consumer patterns or preferences within the illicit market?
CM: Our study didn’t cover consumer patterns or preferences within the illicit market. However, our data did reveal some ancillary consumer patterns, including:
- Prevalence of flower and extract inventory in the illicit market seems to indicate a strong preference for these products.
- The category preference seems to indicate illicit cannabis users are more sophisticated and educated than the average legal cannabis consumer.
- 5g seems to have emerged as the preferred size variety for consumers in the legal market, indicating less preference for smaller package sizes. We observed a similar trend in the illicit market where 3.5g and above sizes were more common.
GO: How do you see the dynamic between legal and illicit cannabis markets evolving in the coming years?
CM: In the short-term, I believe we’ll see the status quo with no major developments aside from a continuation of current trends such as price compression, financial viability leading to more consolidation / exiting of legal players, and a relatively stable illicit market.
However, we see the conclusion of the Health Canada Cannabis Act Review to be a real catalyst for potential changes to the illicit market.
GO: How confident are you in the accuracy/reliability of the data presented in the report?
CM: We are confident in the accuracy and reliability of the report. The scope of the report was reduced to dry flower and general inventory data to ensure we could properly QA and vet the data.
Find a link to the study here.