Cannabis industry calls for regulatory changes five years after legislation
, BNN Bloomberg
Oct 17, 2023
, BNN Bloomberg
Oct 17, 2023
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.
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.
Cannabis Act review finds companies struggling to profit, health experts supportive
A review of the federal legislation that paved the way for the legal recreational use and sale of cannabis says companies in the legal market report struggling to realize profits and maintain financial viability.
Retailers cite the burden of taxes, markups, fees, and regulatory compliance costs as barriers to the industry's viability, which they say is a necessary precondition to maintaining a safe and legal source of supply and to combat the illicit market.
The statutory review was launched by the federal government last year to analyze the Cannabis Act, which in 2018 set purchase and possession limits at 30 grams of dried pot or the equivalent, restricted youth access to marijuana and established safety requirements for growing, selling and transporting the substance.
The report says public health experts remain supportive of the legislation's precautionary approach, including THC limits for edible cannabis products and restrictions on promotion, while some suggest considering stricter age limits on who can possess, distribute and buy cannabis.
While the panel that conducted the review says it heard progress has been made on deterring criminal activity and displacing the illicit market, many public safety stakeholders remain concerned about unauthorized retail stores and illegal online channels.
Panellists heard varying viewpoints on whether consumer demand was being met, with consumers still seeking products unavailable in the legal market such as higher-potency edibles, along with limited access in some rural and remote regions
A review of the federal legislation that paved the way for the legal recreational use and sale of cannabis says companies in the legal market report struggling to realize profits and maintain financial viability.
Retailers cite the burden of taxes, markups, fees, and regulatory compliance costs as barriers to the industry's viability, which they say is a necessary precondition to maintaining a safe and legal source of supply and to combat the illicit market.
The statutory review was launched by the federal government last year to analyze the Cannabis Act, which in 2018 set purchase and possession limits at 30 grams of dried pot or the equivalent, restricted youth access to marijuana and established safety requirements for growing, selling and transporting the substance.
The report says public health experts remain supportive of the legislation's precautionary approach, including THC limits for edible cannabis products and restrictions on promotion, while some suggest considering stricter age limits on who can possess, distribute and buy cannabis.
While the panel that conducted the review says it heard progress has been made on deterring criminal activity and displacing the illicit market, many public safety stakeholders remain concerned about unauthorized retail stores and illegal online channels.
Panellists heard varying viewpoints on whether consumer demand was being met, with consumers still seeking products unavailable in the legal market such as higher-potency edibles, along with limited access in some rural and remote regions
From high flying to burnout, pot industry faces
downturn five years post-legalization
,
When Abi Roach thinks about the 20 years she spent fighting for Canada to legalize cannabis, she says pot legislation is like a clenched fist.
The analogy, which Roach first heard from a former Toronto councillor, represents the tight grip on the cannabis market that legislators held for centuries. It meant Roach had to exploit a grey area of the law to run her popular cannabis consumption space HotBox, which opened in 2000, and its customers were accustomed to looking over their shoulders for cops before walking through the door.
Roach has been a stalwart in Canada’s cannabis industry as a longtime advocate for legalization and queen of an empire that eventually spanned 15 different businesses, including a magazine, a tour company and lines of pot accessories and apparel.
While regulations and attitudes have loosened since Canada legalized recreational cannabis five years ago, Roach said policy constraints and industry response mean there is still "a ton of room to go” before the industry reaches general acceptance.
"It's the closed fist that slowly opens as we prove ourselves to society as being just a normal part of everyday life," she said, as the fifth anniversary of cannabis legalization approaches on Oct. 17. "The world isn't exploding, the chickens aren't going to fall from the sky, if people are consuming cannabis.
“Five years into it, you're really seeing that cannabis is an industry that is viable."
The signs of that viability are everywhere. Cannabis shops dot some of the most coveted strips in Canadian real estate. Alberta- and Ontario-based giants have expanded their medical pot businesses into Europe. The domestic recreational market is valued in the billions.
Cannabis legalization has had wide-reaching effects and made its use more accessible and acceptable.
Yet the razzle-dazzle days where money was no object and sky-high demand was expected are gone, replaced by a sobering reality: legalization has fallen well short of expectations.
The biggest companies – Canopy Growth Corp., Aurora Cannabis Inc. and Tilray Brands Inc. – have shrunk their footprints, laid off thousands and grappled with balance sheets that reflect a turbulent market and a longer march to profitability than many once imagined.
Others weren’t so lucky. They sold their business at bargain prices to a bigger rival, folded or declared bankruptcy.
And Roach worries the carnage isn’t over.
"Until there's a real regulatory reform in all of the main pain points of the industry, we're going to continue to see companies go bankrupt ... and a lot of consolidation in the market," Roach predicted.
"It's becoming much harder and harder, not only to raise capital to get out of trouble, but also to sell your company. I know people that were trying to sell their cannabis stores. Nobody wanted it."
Many cannabis businesses were doomed from the start. They spent fast and furiously in anticipation of legalization, scrambled to produce the right amount of pot — first there was not enough, then too much — and discovered catering to consumers wasn’t easy.
Canadians wanted more potent products in packaging that wasn’t dull. Others couldn't shake relationships with longtime dispensaries and dealers who could supply pot at a fraction of the price of the legal market.
Cannabis companies wanted governments and police to go after illicit sellers more aggressively, but felt authorities never put their full might behind the cause, so pot producers took an “If you can't beat them, join them” approach.
"The only way to convince an illicit market consumer to migrate into the regulated market is to have a comparably priced product," said Vivien Azer, a managing director and senior research analyst at TD Cowen who specializes in the cannabis sector.
Hexo Corp. paved the way, she said, when it launched 28-gram packages of Original Stash dried cannabis flower in 2019 (Hexo was acquired by Tilray in April). It sold for $140, or roughly $5 per gram in Ontario, and slightly less in Quebec. Then-chief executive Sebastien St-Louis marketed it as disrupting the black market.
"Everyone else followed, and 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 for dried cannabis was $7.50, down from $11.78 per gram at the start of 2019.
By last month, most of the dried flower products selling in the Ontario Cannabis Store were priced around $3.50 per gram, with a few more selling for around $5 or $6 per gram.
"With that price deflation, you could kiss profit aspirations goodbye," Azer said.
The excise taxes the federal government and provinces charge to licensed producers only made matters worse.
For dried and fresh cannabis, plants and seeds, the taxes amount to the higher of $1 per gram or a 10-per-cent per gram fee.
For edibles, extracts and topicals, the duty is set at one cent per milligram of tetrahydrocannabinol, cannabis' active ingredient, in the product.
While these rates were palatable at the time of legalization, when people predicted cannabis would sell for $10 per gram and taxes would thus be low, pot companies are now almost universally railing against the rates.
A May 2022 analysis from the Cannabis Council of Canada found a package with 28 grams of flower selling with HST for $124.78 would carry excise duties of $29.13, or 23 per cent of the purchase price.
Roach realized the tax “is absolutely unrealistic,” after she sold her beloved HotBox to the Friendly Stranger pot firm in 2020. It later turned the business over to Fire & Flower Holdings Corp., which has since filed for creditor protection.
Following a stint at the Ontario Cannabis Store, Roach became a head of product marketing at St. Thomas, Ont., business Mera Cannabis Corp., where staff recently calculated manufacturing costs for a 14-gram flower product were $15, but taxes amounted to $16.50.
And many of those are going unpaid. Roughly $200 million in excise taxes are outstanding from the cannabis sector, Canada Revenue Agency spokesperson Nina Ioussoupova said in an email.
Until the regulations are reformed, Roach maintains there’s going to be a “continued mess” in the industry while the illicit market maintains its strength.
“We’ve been through a lot and I did 20 years fighting for legalization, but I always say I didn't fight for legalization to purchase 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 into 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 in Canopy traded for about $68 and Aurora opened at $195. Their average stock prices over the past three months have been below $1.
As they watched valuations dwindle, companies argued that the widespread presence of unlicensed dispensaries and other underground sellers was still a problem. To this day, Health Canada estimates they have a hold over 40 per cent of the market.
"The illicit market is why the legal industry isn't as healthy as everybody would like to see it," said David Klein, Canopy’s chief executive.
"It probably is the single biggest challenge because if the illicit market would have gone away, as people predicted, you wouldn't have seen the dramatic shutdown of facilities and layoff of employees,” he said.
“Those sales would have been available for the legal players."
Thousands of cannabis workers have received pink slips over the last five years and many of the greenhouses and offices where they worked are in the hands of 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 been a volatile five years for sure," Klein acknowledged, saying up until nine months ago Canopy was still hoping to get more overall market growth out of the industry.
Since then, Canopy realized "the concept that you needed to be everywhere and you needed to be everything for everyone was flawed," he said.
It sold its Tokyo Smoke retail business to the owners of the Edmonton Oilers hockey team, rethought how many facilities it needed and took a more realistic approach to the possibility of the U.S. legalizing cannabis on a national level — a development pot executives have long sold to investors as their ticket to profitability but has yet to happen.
"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 that business can be profitable, and then once we build that really solid foundation, which we now have, then we can look at opportunities to grow."
This report by The Canadian Press was first published Oct. 13, 2023.
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