Skip to Content

Slow to grow

Almost a year after legalization, the legal cannabis market is a long way from displacing the illicit one.

Legalization in Canada

The legalization of cannabis in Canada has so far failed to stop the distribution of illicit marijuana throughout the country, experts say— with a lack of supply and high cost of the product identified as the key factors.

When the Cannabis Act— which controls the sale, possession, production, and distribution of marijuana in Canada— came into force on October 17, 2018, Canadian adults were allowed to purchase cannabis products from provincial retailers.

"The point of the law was to provide Canadians with a reliable, legal supply of cannabis," says Adam Pankratz, a lecturer at the University of British Columbia's Sauder School of Business and an expert in business decisions related to marijuana legalization.

But Pankratz describes the Cannabis Act as "very restrictive." He adds: "there is good political rationale behind that, but it has hurt the businesses' ability to actually sell the product. That is causing the roll-out issues that we are currently seeing."

The primary problems with the distribution of legal cannabis across the country are the issues with the supply chain and the backlog of getting product to customers. "I think the roll-out has been much more awkward and much clunkier than many were expecting," he says.

Paul Lewin, a Toronto lawyer who focuses his practice on litigation and consultation on matters related to cannabis, agrees that there are issues with legal cannabis supply. He notes that applications for companies trying to enter the cannabis industry are moving slowly.

"The black market hasn't really gone away. It probably won't," he says.

Pankratz agrees. "You have got the legal product that is selling at 30 per cent, 40 per cent or sometimes even 50 per cent more than the illicit drug. This is not addressing anyone's interests. This is not addressing the government's interests in getting drugs off the street, and it's not addressing the businesses' interests either," he says.

Lewin says he expects changes to the legal treatment of cannabis offences by Canadian courts. Some changes have already taken place; others are imminent.

"Right now prosecutors are treating this as though we are still back in the stone ages -- that people should get jail time for cannabis," says Lewin. "I think there will be a recalibration as Cannabis Act charges start making their way through the system. I am eagerly looking forward to the first time that I get to argue one of these. Because the whole premise of prohibition is that cannabis is some sort of poison that we can't let people access. So that's now all gone. And now it's just a regulatory matter."

On Aug. 1, 2019, Canadians convicted of simple cannabis possession became eligible to apply for a no-fee expedited pardon from the Parole Board of Canada for a record suspension. This amendment to the Criminal Records Act waives the $631 application fee and the up to 10-year waiting period to apply for a pardon.

Later this fall, edible cannabis and cannabis extracts become legal on October 17, 2019. The regulations for so-called "edibles" are stringent -- providing limits on the amount of THC per package and restrictions on additions of caffeine, sugar, sweeteners, and colours. The products must also not be appealing to youth and must not make health or cosmetic claims.

"Edibles won't be very popular," Lewin predicts. "There is a very tough rule on the strength of cannabis oil, which cannot be very strong. If you consumed this cannabis oil, you probably wouldn't even know you consumed some."

Lewin says he expects that the black market will outshine the legal dispensaries on edibles and on extracts.

"When we get into edibles, we will start to develop companies that are more than just agricultural producers," Pankratz predicts. "By that I mean, companies that can really market a product and develop expertise in the packaged goods industry and the food industry. And that will be a shift."

Another big change Pankratz expects to see in the future is the consolidation of the cannabis industry.

"Right now we are in the gold rush time — so to speak —of the industry so now we will see these smaller companies either fail or get eaten up by the larger companies that have deeper cash reserves," he says. "I think you will see investors start to value the companies differently. We are already seeing this. Marijuana stocks have fallen quite drastically in the last few months. That is a reaction to investors starting to get past the 'gold-rush mentality' and starting to really value the companies on more traditional metrics. So that has pushed the stocks down."

Stock prices will likely rebound in time, says Pankratz. "But there will be that consolidation and valuing based on traditional metrics, and then fewer companies will be worth more."

Although Lewin says there will probably be a "Walmart of pot out there" in the future, he expects that it will be tough for companies to form monopolies in the cannabis industry.

"I don't think that it is going to be a giant monopoly -- like Coke and Pepsi -- since it's a plant that has been widely decentralized, the growing and production of it for many years because of prohibition," Lewin says, adding that he expects that "there will be increasing ways to get into the industry without being a billionaire. This is a plant after all. This is not something you need to make in a laboratory."

In contrast to Pankratz's prediction that the cannabis industry will consolidate, Lewin expects that cannabis production will continue to diversify.

"Microgrowers and microprocessors will keep coming on-line. There will be more and more small players," Lewin says.

Pankratz concludes that there is more change to come in the industry. "Cannabis is still a new industry. There is still a lot we don't know. I am sure there will be things that happen over the next six months that surprise us all."