Outlook for pot stocks as legalization looms
The price Canadians will pay for recreational cannabis on day one of legalization might not be the same price they pay on day 31.
“Pricing is something we expect to be very dynamic in the beginning,” Ryan Kaye, vice-president of operations for Calgary-based Four20 Premium Market, which is preparing to open more than two dozen pot retail locations in Alberta, told BNN Bloomberg in a telephone interview. “There will likely be price changes in the first few weeks of legalization.”
Determining pot pricing levels has been among the most delicate challenges governments across Canada have faced as they prepare for legalization to take effect on Oct. 17. Making legal cannabis too expensive will encourage consumers to keep buying from illicit market sources, experts have long warned, while pricing pot too low could encourage overconsumption of a potentially harmful intoxicant.
While the federal government has suggested an average pre-tax retail price of roughly $10 per gram to be competitive with criminal sources, the data suggest illicit market participants have long been preparing to undercut their soon-to-be competitors.
“Prices have definitely been coming down over the past two or three years,” Conrad Barber-Dueck, an economist at Statistics Canada focused on cannabis-related research, told BNN Bloomberg in a telephone interview from Winnipeg. “Now, we haven’t gone out to the dealers and said, ‘Hey, your prices are going down, why is that?’ [but] it could be about upcoming legalization [and/or] enforcement not being as strong as it was before so their own costs could be falling.”
Source: Statistics Canada; 2018 data is based on the first six months of this year
Regardless of the reason why, declining cannabis prices overall is among the reasons Four20’s Kaye expects significant volatility in the early days of legalization.
“There is going to be some shift in prices within the first month of around 20 per cent,” Kaye predicted. “Everyone has to pick their prices to start and nobody knows what anybody else is doing [so] there will likely have to be several months in which we do not experience shortages before pricing can achieve some stability.”
While recent research suggests Canadians would be willing to pay a premium to grey market prices to avoid having to purchase cannabis illegally, the CEO of a company set to become one of Canada’s largest private cannabis retailers argues no price will be low enough to convince preexisting pot consumers to start purchasing legally right away.
“In the early months it is not going to be a price-driven thing, we can’t compete against the black market on price,” James Burns, CEO of Alcanna, which is planning to open 37 Nova Cannabis stores across Alberta by mid-2019, told BNN Bloomberg in a telephone interview from Calgary. “I wouldn’t anticipate a lot of people who have been using it comfortably outside the law for a long time instantly switching over to waiting in line in a legal store.”
When it comes to convincing people to abandon their local dealers in favour of legal stores, Anindya Sen argues price is nowhere near as important as convenience.
“The real problem is not price, but retail availability or the effective price,” the University of Waterloo economics professor, who recently co-authored a study with the C.D. Howe Institute on cannabis supply levels, explained to BNN Bloomberg via telephone. “Illegal prices could even be above legal prices but people still do not want to wait for days to accept delivery,” Sen explained, referring specifically to Ontario’s plan to offer online-only cannabis sales for the first several months of legalization.
“We have been so focused on making sure we have a competitive legal price, but that is meaningless unless there is a good retail infrastructure out there that is convenient for consumers to access,” he said.
On that front, Canada’s legal recreational marijuana regime falls short. Barely one-third of Canadians (34.7 per cent) will live within 10 kilometres of a cannabis store as of October 17th, according to Statistics Canada data, compared to roughly 90 per cent of Canadians living within the same distance of a liquor store.
Scarcity of storefronts is just one of the reasons Kaye and others expect recreational cannabis prices to fall once the dust settles after the initial rush on legalization day.
“Prices, especially on the wholesale level, will likely start out the highest we will ever see,” Kaye said.
Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day