Pot poised to top sales of liquor by 2020

Cannabis sales could soon eclipse hard liquor sales in Canada, according to a new report by The Canadian Imperial Bank of Commerce analysts, with provincial governments, rather than private companies, expected to reap the most benefit.

Legal recreational marijuana sales could hit $6.5 billion by 2020, topping the $5.1 billion Canadians spent on spirits in 2017 and approaching $7 billion spent on wine, according to the report released Tuesday.

“The bulk of the value generated from this industry will accrue to Canada’s provinces. In fact, we estimate that provinces will generate over $3 billion of income, either in the form of earned profits or taxation revenues,” CIBC analysts John Zamparo, Prakash Gowd and Mark Petrie wrote in the report. “The provinces will hold all the cards when it comes to distribution … In fact, we estimate that provincial governments will capture a stunning 70 per cent of industry profits.”

In contrast, private companies “will generate nearly $1 billion in EBITDA (earnings before interest, taxes, depreciation and amortization),” the authors estimate, “as part of the shadow economy becomes legitimate business.”

The calculations are based on the assumption that Canadians will be buying roughly 800,000 kilograms of legal recreational marijuana by 2020 at a price of about $8 per gram (or $10 a gram at the counter once you add excise and sales tax).

That’s up from roughly 773,000 kilograms that Statistics Canada estimates was sold on the black market in 2017, and assumes that the legal market will be able to capture the lion’s share of consumers within a short period of time.

Keeping retail prices relatively low is key in the transition, the analysts write. “Retailers who think $20/gram cannabis is attainable will quickly find consumers walking out of their stores, pulling out their phones, and DM-ing their previous dealer to see if they can still get that deal on Bruce Banner at $8/gram,” CIBC analysts said.

The potential $8-gram pot doesn’t mean licensed producers will be achieving big markups on their product, which they can grow at well under $2 a gram. “As a starting point, investors should assume that any value added to distribution (also known as wholesaling) of the product will be within the government sector,” the analysts write.