Pot industry faces challenge of filling demand in 'very near term': Business of Cannabis
Eager pot buyers hoping to score some weed when Canada goes legal next week could be in for a bummer.
Across the nation, only a handful of retail locations will be up and running on Oct. 17, including just one store in British Columbia and none in Ontario, Canada’s most populous province. Producers, meanwhile, are unlikely to come close to meeting initial demand due to delays in getting licenses and signing supply agreements. The result will be limited selections of dried bud and oils for consumers.
“It will be a fairly thin market to begin with and maybe that’s why a lot of these provinces haven’t rushed to get retail locations and bricks and mortar for day one,” said PI Financial analyst Jason Zandberg. “I would expect there to be long waits and very limited product types.”
The limited store openings and pot supplies may hamper sales at the outset, curbing enthusiasm for pot stocks that have soared in anticipation of Canada becoming the first Group of Seven nation to legalize marijuana. Canada’s market is expected to soar to $4.3 billion (US$3.3 billion) in the first year, according to Deloitte, with global demand poised to juice sales further as more countries follow Canada’s lead.
While there have been worries about producers being able to meet demand for day one, that concern has now extended to the distribution end as many retailers are working through provincial approval processes to establish their footprint.
It’s a scenario that’s played out in other jurisdictions. When recreational use was legalized in California in January, initial bottlenecks crimped inventory. In Colorado, one of the first U.S. states to legalize recreational pot, long lines snaked around dispensaries and prices soared as high as US$400 an ounce.
“There just isn’t that much product that’s going to be available day one,” said Zandberg.
He noted some major capacity expansions, including Aurora Cannabis Inc.’s Sky facility in Edmonton, Alberta, won’t have full production online until later this year or early 2019. “We’re still waiting on a number of large facilities to be completed and have full production come out.”
The supply of legal pot in Canada will only meet 30 per cent to 60 per cent of demand after legalization, keeping the black market very much alive and stunting the government’s tax take, according to a new study.
Cannabis supply will reach about 210 tonnes, or 210,000 kilograms, in the first year after Canada legalizes marijuana, according to the report to be released this week by researchers at the University of Waterloo and the C.D. Howe Institute. Demand meanwhile, will be about 610 tonnes.
“There will not be enough legal supply, especially during the first half of the year following legalization, primarily because of the slow rate of licensing producers,” Anindya Sen at the University of Waterloo and Rosalie Wyonch at Toronto-based C.D. Howe said in their report.
Still, the federal government says Canada is “well positioned” to supply cannabis, with 66 licensed producers given the go-ahead to sell marijuana, said Mathieu Filion, a spokesman for Health Minister Ginette Petitpas Taylor. More than 160 expansions or modifications of existing facilities have been approved since June 2017 and the government estimates the nation’s licensed growers have in excess of 11 million square feet of space as of the end of June.
“Based on current inventory levels and growth in production capacity, the industry is well positioned to supply product as consumers transition to the legal market,” Filion said Tuesday in an email.
In Ontario, expected to account for 40 per cent of the Canadian market, initial sales will be restricted online after newly elected Premier Doug Ford delayed the province’s plans for retail stores until April. The government-run Ontario Cannabis Store has signed supply agreements with 32 licensed producers and is confident that it will have a “wide variety” of products available when legal sales begin, said spokesman Daffyd Roderick. The online deliveries in Ontario will be made by Canada Post, the federal mail service that faces a potential labor strike.
British Columbia has already warned that supplies won’t meet expectations.
“The volume of product will be considerably lower than what licensed producers originally committed to providing” amid insufficient supplies of packaging materials and lower crop yields, the provincial liquor agency said in an emailed statement. “BC is not alone in this situation; shortages are expected to impact all jurisdictions across Canada.”
The roll-out in other parts of the country varies:
Alberta expects to have as many as 17 stores operational on Oct. 17. British Columbia’s Liquor Distribution Branch says its lone store will be in Kamloops, 300 kilometers (186 miles) from Vancouver. Saskatchewan estimates that about a third of its planned 51 retail locations will be ready for the first day. Quebec, the second largest province, plans to have 12 stores open, while Nova Scotia, with an eighth of Quebec’s population, will also have a dozen locations open next week.
“As much as it seems we had several months to put this all together, October 17 is coming very quickly,” said John Arbuthnot, chief executive officer of Winnipeg, Manitoba-based Delta 9 Cannabis Inc., which will have a 3,200-square-foot store open. “We’re going to see some successes on day one and we’re going to see some hiccups as well.”
While the number of products available in legal stores will increase over time, initially there will be dozens, instead of hundreds, available, Arbuthnot said. There’s a chance there could be product-specific shortages and that some challenges could arise if certain items sell out and can’t be restocked immediately, he said.
The federal government didn’t formally announce when sales would start until mid-summer, leaving retailers rushing to draw up architectural and engineering plans, go through the permit and licensing process in addition to hiring and training staff, Arbuthnot said.
“What the demand curve is and how the consumer reacts, we’re all still somewhat in the dark,” Arbuthnot said.
Popular forms of consumption, including edibles, will remain illegal, making it difficult to estimate exactly how many marijuana consumers will initially transition over to the legal market.
“The market isn’t fully online immediately,” Cronos Group Inc. Chief Executive Officer Mike Gorenstein said Sept. 27 at a CIBC investor conference. “The first year is soft a soft launch.”
--With assistance from Kristine Owram
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