Cannabis Retail

Ontario Cannabis Retailers Worry Province is Undermining Profits

Since legal recreational cannabis was first introduced in Ontario in 2018, the industry has been booming. The brick and mortar aspect of the business was slow to get off the ground, with limited retail licences available for a handful of shops. However, in the past two years, the number of physical cannabis shops in the province has increased significantly. In late 2019, there were approximately 50 stores in the province, which grew to around 200 by late 2020. That number is expected to increase to 700 by the end of 2021.

The ongoing pandemic may have been a boon to business as well, with sales increasing by 30% between May and September of 2021. In September 2020, the province vowed to double the approval rate, issuing an average of 10 licences per week instead of the usual 5.

Excess Supply Leads Some Major Players to Reduce Operations

Despite the increase in sales, many of Canada’s cannabis producers are sitting on unused product, and some have even been forced to shutter facilities and lay off staff. According to a recent CBC article, cannabis production was in overdrive prior to the legalization of recreational marijuana. As a result, the industry overall has about seven months’ worth of inventory just sitting around, when a typical supply chain only requires two months’ worth of inventory in reserve.

This has led to some of Canada’s larger producers cutting back on facilities and staff in order to boost profitability. One of those is Canopy Growth, a company we previously wrote about in September 2020. At the time, Canopy was facing a lawsuit over its refusal of a significant delivery of product from a greenhouse it had partnered with. Canopy refused the delivery citing a drop in wholesale prices, which were far below the price originally negotiated in the production contract.

Recently, Canopy, which is based in Smith Falls, Ontario, has opted to close operations in five different provinces and let go of 220 employees. The company’s chief executive officer David Klein said the moves are expected to save the company $150 to $200 million, and that the closures won’t affect Canopy’s ability to meet demand in the marketplace. This would seem in line with reports that overall, some of the country’s largest producers are finding they are producing product at too quick a pace.

Ontario’s Retail Cannabis Model: A Brief Overview

While retail shops in the province are privately owned, the Ontario government is deeply entrenched in the retail model. Not only are licencing fees paid to the province, but the Ontario government also acts as a wholesaler for all legally-sold cannabis. The province buys the product directly from producers like Canopy, and then sells it to private retailers. This gives significant control over pricing to the government, ensuring that the prices in the private shops remain in line with the prices on the government-run online retail shop, the Ontario Cannabis Store.

Retailers Would Like to Cut Out the Middle Man

While the existing model worked well when the industry was burgeoning, some private retailers have expressed a desire for a change. One retailer said that the original model was helpful in enabling new retailers to purchase cannabis legally, now that the industry is more entrenched, it’s no longer necessary. In fact, having to buy from the Ontario government, also a direct competitor when it comes to sales, is counterintuitive.

Daffyd Roderick, senior director of communications and social responsibility at OCS said that the current wholesale model benefits both parties, and ultimately, the consumer:

Stores are our partners in growing the size of the legal market, not our competition. Our pricing model is designed to not undercut stores. All stores buy cannabis from us at a fixed markdown from OCS.ca prices. Our customer journey data indicates that OCS.ca and the retail stores actually complement each other, as many consumers read our [educational] articles and browse our products before going to a retail store to purchase the product.

Given that the province is earning income from the licensing fees for new and established retail outlets as well as from the wholesale of cannabis products to those same retailers, things are unlikely to change anytime soon. However, we will continue to monitor significant updates in Ontario’s cannabis retail sector and report them here.

For Skilled Guidance Through Ontario’s Cannabis Retail Industry, Contact GLG LLP in Toronto

At GLG LLP, our business lawyers provide a full range of services to Ontario’s growing cannabis industry. They advise clients with respect to licencing, regulation and operations for new and existing cannabis retailers and cultivators. To speak with a lawyer, please contact the firm online or call 416-272-7557.