{"id":267677,"date":"2019-11-18T11:31:22","date_gmt":"2019-11-18T16:31:22","guid":{"rendered":"https:\/\/policyoptions.irpp.org\/issues\/canadas-cannabis-caper-has-markets-in-chaos\/"},"modified":"2025-10-07T22:43:47","modified_gmt":"2025-10-08T02:43:47","slug":"canadas-cannabis-caper-has-markets-in-chaos","status":"publish","type":"issues","link":"https:\/\/policyoptions.irpp.org\/fr\/2019\/11\/canadas-cannabis-caper-has-markets-in-chaos\/","title":{"rendered":"Canada\u2019s cannabis caper has markets in chaos"},"content":{"rendered":"

A year after legalization, Canada\u2019s cannabis market is in shambles. The number of retail outlets is ludicrously insufficient; inventories are piling up in retail, wholesale and producer warehouses; the portion of the total market captured by legal sales is disappointing; state-owned monopolies are constipating the system; and almost every segment of the market is incurring financial losses. Not an auspicious beginning to the Liberal government\u2019s enlightened intentions on legalization.<\/span><\/p>\n

It has always been the case that if the legalization of cannabis is to reach its objective of supplanting the illegal stuff, two market characteristics are key: First, legal points of sale need to be plentiful and near potential consumers. Evidence from the US<\/span><\/a> indicates that customers are willing to buy pot legally provided it is easily accessible. Second, the product needs to be priced competitively, that is at a price that is not too much above its illegal counterpart. <\/span><\/p>\n

Legal pot is viewed as having less quality variability than illegal pot. However, at the time of legalization, in October of 2018, Canada had trusted trading relationships between buyers and sellers and well-organized supply networks, with one of the largest per-capita cannabis consumption rates<\/span><\/a> in the world. And pot was really inexpensive by legalization day. When purchased in quantities of a half-ounce or ounce, a price in the neighborhood of $5 per gram was the street norm, according to Statistics Canada\u2019s Cannabis Hub<\/span><\/a><\/span>,<\/span> which provides crowd-sourced data on illegal as well as legal cannabis purchase prices. <\/span><\/p>\n

The legal market project in Canada will be successful only if it meets these two requirements \u2013 accessibility and price competitiveness. As of November 2019, the attainment of these twin objectives appears a long way away. <\/span><\/p>\n

Useful reference points for analyzing the structure of cannabis sales are the tobacco and alcohol sectors. These products, like cannabis, can be unhealthy when consumed excessively, particularly tobacco, which presents fearsome health consequences. Tobacco is associated with<\/span><\/a> premature deaths from cancer, stroke and heart conditions of tens of thousands of Canadians annually; the alcohol sector with merely a few thousand<\/span><\/a>. In the cannabis sector, a score of individuals in the US died in late summer 2019<\/span><\/a> apparently as a result of consuming contaminated street-purchased liquid cannabis in which THC was suspended in a compound that is toxic even in small quantities, illustrating the risks of black-market offerings. <\/span><\/p>\n

Tobacco is sold in every corner store, gas station and supermarket in the nation. Alcohol is available in an uncountable number of bars, hotels, restaurants, supermarkets, and (depending upon the province) corner stores. In some provinces, alcohol has a quasi-monopoly status in retail sales. For example, beer is sold through about 500 beer stores in Ontario, and liquor is sold through about 700. <\/span><\/p>\n

How does the retailing of cannabis compare? Substantial differences characterize its sale in Canada\u2019s provinces. The private sector plays a retailing role in some, not in others. In contrast, recreational cannabis in the US states where it is legal, is totally in the hands of the private sector. The retail structure in most of Canada\u2019s provinces, and the wholesale structure in virtually all of the provinces, more closely resembles what one might have expected in the Brezhnev-era Soviet Union, had the apparatchiks there considered selling the stuff: government-owned and -operated monopsonies (a market situation where there is only one buyer) and monopolies with customer line-ups lasting hours. As of October 2019, my local pot shop on Ste. Catherine St. in Montreal has frequent eye-catching lineups.\u00a0<\/span><\/p>\n

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Photo: SQDC customers on Ste. Catherine St. on day one.<\/figcaption><\/figure>\n

Quebec ultimately plans on a pot chain containing 150 stores owned and operated by the <\/span>Soci\u00e9t\u00e9 qu\u00e9b\u00e9coise du cannabis <\/span>(SQDC<\/span><\/a><\/span>). Today it has about 25. Ontario initially ran a lottery for 25 retail licenses and is processing another 50, though, as of late September, the process of allocation overseen by the Alcohol and Gaming Commission of Ontario (AGCO) had turned farcical as a result<\/span><\/a> of AGCO process errors. <\/span><\/p>\n

The combined population of these provinces is about 23 million. Ontario decided to make just 25 available in the first lottery, and declined to issue further licenses until production capacity was increased \u2013 on the premise, presumably, new businesses did not need to plan ahead for a period when supply would be more available. In contrast, Alberta<\/span><\/a> aims to have several hundred privately run retail stores for a market of 4 million individuals. In British Columbia, the Liquor and Cannabis Regulation Branch operates<\/span><\/a> government-owned stores, regulates, and issues licenses for the operation of privately owned stores. But British Columbia has a well-developed illegal market, and progress in selling legal recreational cannabis has been staggeringly slow<\/span><\/a>. Early sales through government stores have been miniscule. Statistics Canada reports<\/span><\/a> that such sales were the second lowest in the economy until August 2018, when they finally began to pick up.\u00a0 <\/span>PEI, which has about 3 percent of British Columbia\u2019s population, sold the least. <\/span><\/p>\n

At the wholesale level, each province\u2019s politburo has formed a central agency that is the sole legal conduit for the transit of cannabis from the producer to the consuming public. Thus, while some provinces have privatized retail sale, all (with the exception of Saskatchewan) have decided that at the wholesale level government monopsonies are superior to a somewhat freely functioning marketplace. <\/span><\/p>\n

These monopsonies provide little additional value to consumers that could not be supplied by a well-regulated system of sale, where producers and processors sell directly to retailors subject to a \u201cseed-to-sale\u201d tracking policy combined with strict laboratory testing. Seed-to-sale systems can track plants in the growing stage through to the final production of bud.<\/span><\/p>\n

While the early-to-legalize US states (Colorado, Oregon, Washington) adopted different methods of (a) allocating production and sale licenses and (b) laboratory testing, they share a similar philosophy. The outcome is that they arrived quickly at a point where each state had several hundred producers and processors <\/b>and several hundred retail outlets<\/b>. None has adopted Canada\u2019s monopsony-monopoly model. Given that they each issued a total of at least 1,000 licenses in the space of a couple of years, and that Health Canada has managed to issue just 220 in a similar time frame, the process associated with granting a license is obviously more cumbersome in Canada than in the US. The difference could reflect a culture more favourably disposed to the role of competitive markets in the US: \u201cif it\u2019s in demand, allow it, and we\u2019ll regulate it if necessary,\u201d as opposed to \u201cif it\u2019s in demand, let\u2019s see if we should allow it, and if we should, let\u2019s create a government agency to act as vendor-in-chief.\u201d<\/span><\/p>\n

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Photo: Oregon Weedery, a recreational and medical cannabis dispensary in Portland, Oregon.<\/figcaption><\/figure>\n

Well, what about sales in Canada at this stage of the game? A study of the data<\/span><\/a> produced by Statistics Canada and Health Canada, and available on the Health Canada cannabis hub site, suggests that as of late summer 2019, about one-third of all medical and recreational cannabis consumed is being sold through legal outlets. Province-level data are provided in figure 1.<\/span><\/p>\n