Five years after cannabis was legalized in Canada, experts and industry players say regulatory issues have weighed on the success of the industry. 

Nawan Butt, a portfolio manager who oversees a cannabis ETF, told BNNBloomberg.ca that regulation is the biggest challenge to Canada’s cannabis industry, and a main reason why things have been slow ever since legalization in October 2018.

“They came up with a set of rules and directives, which then moved very slowly and evolved very slowly to keep up with what were the actual demands of the consumer,” Butt, also head of capital markets at Purpose Investments, said in an interview. “We've seen Canada just under-serve its consumers, to some extent.” 

According to Butt, the industry’s underperformance is due largely to the limitations of regulators.  Slow progress in that area has led to the cannabis sector having the “highest proportion of all bankruptcies in Canada” in 2022, he argued.

“Regulators have done a disservice of sorts to the investors and operators in the space that really were sitting on an industry that was net new, could generate a lot of taxes (and) could generate a lot of jobs,” Butt said.

LEGALIZATION ANNIVERSARY

On Oct. 17, 2018, the federal Liberal government changed prohibition laws on the recreational use and sale of cannabis that had been in place for about a century.

Since then, it’s been a rocky path for operators in the industry navigating the legal market in Canada.

A review of the Cannabis Act published last week found that retailers in the industry were struggling with financial viability, due in part to the costs associated with regulatory compliance like taxes and fees. The review was launched last year by the federal government.

Omar Khan, public affairs officer at cannabis business High Tide, called for attention to regulatory issues within the cannabis industry, warning these could have political consequences for the federal government if left unaddressed.

“What started off as a political and economic boom for the federal Liberals risks becoming an albatross come the next election, because for whatever reason the current federal government just doesn't seem to be taking this sector as seriously as it's taking other comparable sectors,” Khan said in an interview with BNNBloomberg.ca.

EXCISE TAXES 

Khan said the excise tax is causing problems for retailers. The tax in its current form was based on assumptions made in 2015 that the average price per gram of cannabis would be $10, Khan explained, and that price point is “much lower” today.  

“Currently, cannabis producers have to affix a unique excise stamp for each province or territory. That creates a bit of a mess for companies and it adds a certain level of cost onto consumers,” he said. 

According to Khan, the regulatory framework for the excise tax should be updated, but industry players have had difficulty engaging with federal officials on the issue – a theme that applies to engagement on other priorities for the industry, he added.

INDUSTRY PERFORMANCE: "EBBS AND FLOWS"

As the industry faces frustrations at the five-year mark, Khan noted that the first three years of legalization were “quite successful” from an economic perspective.

A joint report by the Ontario Cannabis Store and Deloitte released in February 2022 found that the cannabis industry contributed $43.5 billion to Canada’s gross domestic product between 2018 and 2021. During that same time, Khan said, the industry sustained about 151,000 jobs across the country.

Butt said the development of cannabis capital markets in Canada was “the first of its kind in the world,” and a “new playbook” was needed to determine the best way to invest in the industry.

Since then, he said, the industry has gone through “ebbs and flows.”

“What the industry did was make very, very large promises that were very difficult to keep. And therefore valuations have been very volatile over time,” Butt said.

Butt manages the Purpose Marijuana Opportunities Fund, the nation's first actively managed cannabis fund which was launched in February 2018.

At one point, Butt said his fund hit $50 million in assets. It now has about $7 million in assets under management.

“Part of those assets have dwindled because the market capitalization in the space has come down significantly,” Butt said.

“The other part is the challenges of the space have made themselves very clear to investors and investors are now more careful of the space overall, rather than being very embracive of it.”  

LOOKING AHEAD 

Emily Riehl, a regional sales director for Western Canada at Greentone, told BNNBloomberg.ca that while the industry has experienced volatility, some firms have been able to improve fiscal performance and could continue to do so.

Despite improvements, some companies “continue to make big mistakes,” she said. Instances like that have given the industry a bad reputation and have “scared” people away from participating or investing in the legal cannabis market, she said.

Five years is not enough time to judge the performance of a new industry, Riehl argued, but to date, “there’s been more failures than there have been successes.”

“Obviously many (cannabis firms) have made billion-dollar mistakes, it feels like at this point. But I do think that there's hope and we're seeing companies that are turning around their balance sheets,” she said in an interview.

Riehl said producers are now “starting to get their feet under themselves” and make better choices, which in some cases unfortunately involves reducing employee headcounts. 

Over the next six to eight months, she said people could be “pleasantly surprised with how much better everybody’s doing” in Canada’s cannabis industry.

“We're finally at a point now where we're, I hate to say it so bluntly, moving away from hiring the cool stoner next door and moving towards more professional people coming in to teach the rest of the industry how to operate and work more professionally and efficiently,” she said.