When Abi Roach thinks about the 20 years she spent fighting for Canada to legalize cannabis, she says marijuana legislation is like a clenched fist.
The analogy, which Roach first heard from a former Toronto councillor, represents the tight control over the cannabis market that lawmakers maintained for centuries.
This meant Roach had to exploit a gray area of the law to run his popular HotBox cannabis consumption space, which he opened in 2000, and his customers were used to looking over their shoulders for police before walking through the door.
Roach has been a stalwart in Canada’s cannabis industry as a long-time advocate for legalization and queen of an empire that eventually spanned 15 different businesses, including a magazine, a travel company and clothing and accessory lines for dope.
While regulations and attitudes have relaxed since Canada legalized recreational cannabis five years ago, Roach said political limitations and industry response mean there is still “a lot of room to go” before the industry reaches acceptance. general.
“It’s the clenched fist slowly opening as we demonstrate to society that we are simply a normal part of everyday life,” he said, as the fifth anniversary of cannabis legalization approaches on Oct. 17.
“The world is not exploding, chickens are not going to fall from the sky if people use cannabis.
“Five years later, you’re really seeing that cannabis is a viable industry.”
The signs of that viability are everywhere. Cannabis stores are located in some of the most coveted strips of Canadian real estate. The Alberta and Ontario-based giants have expanded their medical marijuana businesses to Europe. The national recreational market is valued in the billions.
The legalization of cannabis has had wide-ranging effects and has made its use more accessible and acceptable.
However, the days of hype when money was no object and sky-high demand was expected are long gone, replaced by a sobering reality: legalization has fallen far short of expectations.
The largest companies — Canopy Growth Corp., Aurora Cannabis Inc. and Tilray Brands Inc. — have reduced their footprints, laid off thousands and face balance sheets that reflect a turbulent market and a longer path to profitability than many realize. ever imagined.
Others were not so lucky. They sold their business at bargain prices to a larger rival, but either failed or declared bankruptcy.
And Roach worries the carnage isn’t over.
“Until there is true regulatory reform across all of the industry’s major pain points, we will continue to see companies go bankrupt… and a lot of consolidation in the market,” Roach predicted.
“It’s becoming more and more difficult, not only to raise capital to get out of trouble, but also to sell your company. I know people who were trying to sell their cannabis stores. Nobody wanted it.”
Many cannabis businesses were doomed to fail from the start. They spent fast and furious in anticipation of legalization, rushed to produce the right amount of marijuana (at first there was not enough, then too much) and discovered that serving consumers was not easy.
Canadians wanted more powerful products in packaging that wasn’t boring. Others were unable to shake off relationships with long-standing dispensaries and dealers who could supply marijuana at a fraction of the legal market price.
Cannabis companies wanted governments and police to pursue illicit sellers more aggressively, but felt that authorities never put their full power behind the cause, so marijuana producers took an “If Not” approach. You can beat them, join them.”
“The only way to convince a consumer from the illicit market to migrate to the regulated market is to have a product with a comparable price,” said Vivien Azer, managing director and senior research analyst at TD Cowen, which specializes in the drug sector. cannabis.
Hexo Corp. paved the way, he said, when it launched 28-gram packets of Original Stash dried cannabis flower in 2019 (Hexo was acquired by Tilray in April). It sold for $140, or about $5 a gram in Ontario, and a little less in Quebec. Then-CEO Sebastien St-Louis touted it as a black market disruption.
“Everyone else followed, so you saw this massive price deflation in the legal cannabis market,” Azer said.
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, up from $11.78 per gram in early 2019.
Last month, most dried flower products sold at Ontario’s cannabis store were priced at around $3.50 per gram, with some more selling for around $5 or $6 per gram.
“With that price deflation, you could say goodbye to profit aspirations,” Azer said.
The excise taxes that the federal government and provinces charge licensed producers only made matters worse.
For cannabis, dried and fresh plants and seeds, taxes amount to $1 per gram or a fee of 10 percent per gram, whichever is higher.
For edibles, extracts and topicals, the tax is set at one cent per milligram of tetrahydrocannabinol, the active ingredient in cannabis, in the product.
While these fees were acceptable at the time of legalization, when people predicted that cannabis would sell for $10 a gram and therefore taxes would be low, marijuana companies are now almost universally protesting the fees. .
A May 2022 analysis by the Cannabis Council of Canada found that a package with 28 grams of flower that was sold with HST for $124.78 would incur excise taxes of $29.13, or 23 per cent of the purchase price.
Roach realized the tax “is absolutely unrealistic” after selling his beloved HotBox to marijuana company Friendly Stranger in 2020. He then turned the business over to Fire & Flower Holdings Corp., which has since filed for creditor protection.
After a stint at the Ontario Cannabis Store, Roach became head of product marketing at St. Thomas, Ont.-based Mera Cannabis Corp., where staff recently estimated manufacturing costs for a 14-gram flower product were $15, but the taxes amounted to $16.50.
And many of them do not receive remuneration. About $200 million in excise taxes are outstanding from the cannabis sector, Canada Revenue Agency spokesperson Nina Ioussoupova said in an email.
Until regulations are reformed, Roach maintains there will be “continued disarray” in the industry as long as the illicit market remains strong.
“We’ve been through a lot and I spent 20 years fighting for legalization, but I always say I didn’t fight for legalization to buy cannabis in the 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 a point where the legal market is the only market “.
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. Its average share prices over the past three months have been below $1.
As they watched valuations decline, companies argued that the widespread presence of unlicensed dispensaries and other underground sellers remained a problem. As of today, Health Canada estimates they control more than 40 per cent of the market.
“The illicit market is the reason the legal industry is not as healthy as everyone would like to see,” said David Klein, CEO of Canopy.
“It’s probably the biggest challenge because if the illicit market had disappeared, as people predicted, you wouldn’t have seen the dramatic facility closures and employee layoffs,” he said.
“Those sales would have been available to legal actors.”
Thousands of cannabis workers have received layoff notices over the past five years, and many of the greenhouses and offices where they worked are under new owners.
Canopy has sold seven properties, including the iconic Smiths Falls, Ont., factory it bought from chocolate giant Hershey’s, since April alone.
“It’s certainly been a volatile five years,” Klein acknowledged, saying that up until nine months ago Canopy was still hoping for stronger overall industry market growth.
Since then, Canopy realized that “the concept that you needed to be everywhere and be everything to everyone was wrong,” he said.
He sold his Tokyo Smoke retail business to the owners of the Edmonton Oilers hockey team, reconsidered how many facilities he needed and took a more realistic approach to the possibility of the United States legalizing cannabis nationwide, a developing marijuana that executives have sold for a long time. investors as their ticket to profitability, but it has not yet materialized.
“We decided the right size is the size we are today, so we don’t have to rely on incremental growth,” Klein said.
“Let’s make sure the business can be profitable and then once we build that really solid foundation, which we now have, we can look for opportunities to grow.”