Legal, illicit markets not quite buddies
Canada’s experiment with legal recreational cannabis sales is failing.
The main goal of the feds in legalizing recreational pot in 2018 was to eradicate illicit sales of cannabis.
But the black market is flourishing. It still accounts for an estimated 43 per cent of the total market.
True, the latest figures from Statistics Canada show monthly illegal pot sales dropping from an estimated $1.2 billion in 2018, the year commercial sale of recreational cannabis was legalized, to about $690 million by July 2021.
That number might have further declined since 2021, though pandemic era closings of legitimate pot shops suggest otherwise. And official numbers understate the true size of an illicit market that is impossible to measure with any precision.
If drug dealers keep records, they don’t share them.
Also doubtful are the official numbers on legal pot sales, which Statistics Canada puts at $3.7 billion in the first 10 months of last year.
That’s far short of the $7 billion annual rate of legal pot sales the industry was expecting by now.
And those legal-sales numbers are inflated, since many buyers of what is classified as recreational pot actually use it for medicinal purposes.
The medicinal market has shrunk by 25 per cent since 2018, according to Statistics Canada.
But medicinal pot use didn’t shrink during a pandemic era of elevated anxiety and stress levels. It has instead been tacked on to recreational sales.
Last week, Ontario-based Canopy Growth Corp., the second-largest pot firm, said it will close many of its remaining operations and cut its workforce by about a third.
Canopy has lost money every year since recreational pot sales were legalized, for a total of $4.2 billion in losses since 2018.
And Tilray Inc., the industry leader, has posted total losses of $1.2 billion in that time.
That includes a 30 per cent jump in Tilray’s losses last year, to $477 million. That’s a staggering number. Tilray’s 2022 revenue was only $628 million.
Canopy lays the blame the industry’s misfortunes on the black market.
“Today, there are two very different cannabis markets in Canada,” Canopy CEO David Klein said last week in announcing his long-troubled company’s latest downsizing, which will cut about 800 jobs.
“(There is one market) that’s legal, highly taxed and regulated, and one that’s thriving and illicit,” he said.
To be sure, the pot industry is partly to blame for its misfortunes. In a word, it overexpanded.
There are too many pot vendors chasing too few customers. With some 1,600 Ontario cannabis stores in operation, about one-third of them in Toronto, the province has more pot shops than florists.
Yet despite its ubiquity, the industry has not been able to increase its market’s size.
Statistics Canada’s latest National Cannabis Survey finds that about 20 per cent of Canadians make frequent or occasional use of cannabis.
That number has barely budged since 2018, when it was 22 per cent.
Which is not surprising. Practically everyone who wanted to use pot in 2018 was already doing so, given the easy access to it since the 1960s.
Canopy is a prime example of the legal industry’s reckless growth.
Canopy’s revenues has increased about sevenfold since 2018, to last year’s $520 million. But Canopy’s operating costs increased more than 12-fold during that period.
Canopy invested heavily in cultivation and new product development and made costly acquisitions in the U.S. and Europe expecting pot to be legalized there.
That hasn’t happened. To date, only three countries have legalized the commercial sale of recreational cannabis nationwide: Canada, Thailand, and Uruguay.
Many U.S. states have legalized recreational pot sales. But “in many states, it is not clear whether the price of legal weed will ever be competitive with the price of illegal weed for most consumers,” write University of California agricultural economists Robin Goldstein and Daniel Sumner in their 2022 book “Can Legal Pot Win?”
With its ultralow pricing, the black market is indeed killing the legal one. And it is doing so with a big assist from governments with their steep excise taxes on pot production and lax enforcement of laws to curtail black-market activity.
Illicit marketeers don’t pay excise and income taxes. Nor do they have rent, cultivation, quality assurance, or payroll expenses. (Black market dealers are self-employed.)
The black market’s fierce underpricing means legitimate vendors can fetch only $4 or so per gram, compared with the $10 that governments and the industry expected them to reap when recreational pot was first legalized.
To have imagined that firms like Canopy and Tilray, obliged to try to conduct themselves as model citizens, could achieve commercial viability in competition with lawless low-cost operators was one of the greater fantasies of modern times.
Investors in Canopy have already lost about $18.5 billion. After a 95 per cent drop in its share price, Canopy has market cap of $1.5 billion.
So, there is still money to be lost by pot investors. Don’t be one of them.