When Abi Roach thinks about the 20 years she spent fighting to get Canada to legalize marijuana, she says marijuana laws are like a clenched fist.
The analogy, which Roach first heard from a former Toronto councillor, demonstrates the tight control over the cannabis market that lawmakers have held for centuries. That means Roach must exploit the legal gray area to operate HotBox, its popular cannabis consumption space, which opened in 2000, and whose customers have grown accustomed to looking over their shoulders. police before walking through the door.
Roach was a stalwart of Canada’s cannabis industry as a longtime advocate for legalization and the queen of an empire that eventually expanded to 15 different businesses, including a magazine, a travel company and lines of cannabis apparel and accessories.
While regulations and attitudes have loosened since Canada legalized recreational cannabis five years ago, Roach said policy constraints and industry responses mean there are still “a lot of gap” before the industry became widely accepted.
“It is a closed fist that will slowly open up as we prove ourselves to society that we are just a normal part of everyday life,” she said, celebrating the fifth anniversary of cannabis legalization is approaching on October 17. “The world won’t explode, chickens won’t fall from the sky if everyone consumes marijuana.
“After five years, you really see that cannabis is a viable industry.”
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Signs of that possibility are everywhere. Cannabis shops are scattered across some of the most coveted stretches of Canadian real estate. The giants based in Alberta and Ontario have expanded their medical pot business to Europe. The domestic entertainment market is valued at billions of dollars.
The legalization of cannabis has had a far-reaching impact and made its use more accessible and acceptable.
However, the glory days when money was no longer an issue and demand was sky-high are over, replaced by a sobering reality: legalization has fallen short of expectations.
Largest companies – Canopy Growth Corp., Aurora Cannabis Inc. and Tilray Brands Inc. – has scaled back operations, laid off thousands of people and struggled with a balance sheet that reflects a turbulent market and a longer road to profitability than many had imagined.
Others are not so lucky. They sell their business at a bargain price to a larger competitor, go bankrupt or declare bankruptcy.
And Roach worries the carnage isn’t over yet.
“Until there is real regulatory reform across all the major pain points of the industry, we will continue to see companies go bankrupt… and there is a lot of disruption,” Roach predicts. consolidation in the market”.
“It’s becoming much more difficult, not only to raise capital to get out of trouble but also to sell your company. I know people who are trying to sell their cannabis stores. No one wants it.”
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Many cannabis businesses fail from the start. They spent quickly and furiously in anticipation of legalization, scrambling to produce enough pot — first not enough, then too much — and discovered that serving consumers wasn’t working at all. easy.
Canadians want stronger products in non-dull packaging. Others can’t shake relationships with established dispensaries and dealers, who can offer cannabis at a fraction of the legal market price.
Cannabis companies want the government and police to pursue illegal sellers more aggressively, but feel authorities never go to great lengths to protect this cause, so producers cannabis has adopted the “If you can’t beat them, join them” approach.
“The only way to convince illicit market consumers to move into the market is to make a difference,” said Vivien Azer, a managing director and senior research analyst at TD Cowen who specializes in the cannabis sector. Managed to have a similarly priced product.
She said, Hexo Corp. paved the way when it launched 28-gram packets of Original Stash dried cannabis flower in 2019 (Hexo was acquired by Tilray in April). It sells for $140, or about $5 per gram, in Ontario, and slightly cheaper in Quebec. Then-CEO Sebastien St-Louis marketed it as a disruption to the black market.
“Everybody else followed suit, and so you see this huge drop in prices in the legal cannabis market,” Azer said.
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In November 2021, a report from Deloitte Canada and cannabis research firms Hifyre and BDSA said the average price of dried cannabis was $7.50, down from $11.78 per gram at the beginning of the year 2019.
Last month, most dried flower products sold at Ontario Cannabis Stores were priced around $3.50 per gram, with some other products selling for around $5 or $6 per gram.
“With that price drop, you can say goodbye to profit aspirations,” Azer said.
The excise taxes that the federal and provincial governments levy on licensed producers only make the problem worse.
For dried and fresh cannabis, plants and seeds, the higher tax rate is $1 per gram or a 10% per gram fee.
For edibles, extracts and topicals, the tax is set at 1 cent per milligram of tetrahydrocannabinol, the active ingredient in cannabis, in the product.
While these prices were acceptable at the time of legalization, when people predicted cannabis would sell for $10 a gram and thus taxes would be low, cannabis companies are now almost protesting this price.
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A May 2022 analysis by the Canadian Cannabis Council found that a package containing 28 grams of flower sold under HST for $124.78 would be subject to an excise tax of $29.13, or 23 per cent. purchase price.
Roach realized the tax was “completely unrealistic” after she sold her beloved HotBox to pot company Friendly Stranger in 2020, which later transferred the business to Fire & Flower Holdings Corp., which has filed for creditor protection.
After his time at the Ontario Cannabis Store, Roach became director of product marketing at St. Thomas, Ontario, business Mera Cannabis Corp., where staff recently calculated the production cost for a 14-gram flower product to be $15, but the tax amounted to $16.50.
And many of them will not be paid. Canada Revenue Agency spokeswoman Nina Ioussoupova said in an email that about $200 million in excise taxes is owed from the cannabis sector.
Until regulations are reformed, Roach said there will be “continued chaos” in the industry while the illegal market maintains its strength.
“We’ve been through a lot, and I’ve fought for legalization for 20 years, but I’ve always said I didn’t fight for the legalization of buying marijuana in an unregulated market,” Roach said. ”.
“My dream… maybe not in the next five years but in the next decade, is that we can continue to move people from the unregulated market to the legal market to the point where the market is legal is the only market.”
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Cannabis producers want the same thing.
The morning of legalization five years ago, a share of Canopy was trading for about $68 and Aurora opened at $195. Their average stock price over the past three months has been under $1.
As they see valuations gradually decline, the companies argue that the widespread presence of unlicensed pharmacies and other underground sellers remains a problem. To date, Health Canada estimates it holds more than 40% of the market.
“The illegal market is why the legal industry is not as healthy as people expect,” said David Klein, Canopy’s chief executive.
“This is probably the biggest challenge because if the illegal market goes away, as everyone predicts, you won’t see significant closures of facilities and layoffs,” he said. lay off employees”.
“Those sales will be to legitimate players.”
Why is Canada’s cannabis industry having trouble making a profit?
Thousands of cannabis workers have received pink slips over the past five years, and many of the greenhouses and offices where they work are in the hands of new owners.
Canopy has sold seven properties, including the iconic Smiths Falls, Ontario, factory it bought from chocolate giant Hershey’s, just since April.
“It’s been a tumultuous five years for sure,” Klein admits, saying that up until nine months ago, Canopy was hoping to see more overall market growth from the industry.
Since then, Canopy realized “the notion that you need to be everywhere and you need to be all things to all people is wrong,” he said.
They sold their Tokyo Smoke retail business to the owners of the Edmonton Oilers hockey team, reconsidered the number of facilities needed and took a more realistic approach to U.S. capabilities. Legalize marijuana at the national level – a development company operator has been selling them for a long time. investors like the ticket to profit but it hasn’t happened yet.
“We decided the right size is where we are today, so we don’t have to rely on incremental growth,” Klein said.
“Let’s make sure the business is profitable and then once we build the really strong foundation that we have now, we can look at opportunities to grow.”
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