Production, sales separated
You can’t grow your bud and sell it too, the government of British Columbia told cannabis companies this week, in a move that could make it difficult for micro-producers to compete and impossible for larger producers to get in on the retail action.
On Monday, B.C. released its plan for a public-private recreational cannabis retail market, with government-run stores and online sales alongside private brick-and-mortar retailers. Cannabis producers will sell to the B.C. Liquor Distribution Board, which will supply wholesale product to its own stores and private retailers.
There’s no cap on the number of private retail licences. However, there’s an important caveat: “Where there is a close association (financial or otherwise) between a licensed producer and a non-medical cannabis retail business, the retail business will be prohibited from selling any products from the licensed producer,” according to a licence application guide put out by the B.C. government.
In other words, the government has put a complete firewall between production and sales, explained Kirk Tousaw, a B.C. lawyer specializing in the cannabis industry.
The move has precedence within the alcohol industry where “you don’t have the Anheuser-Busch store, unless it’s at the Anheuser-Busch brewery,” said Tousaw. “But it struck me as a little bit strange … LPs appear to be able to own retail stores, but they can’t sell their own product.”
The announcement has thrown a curveball at licensed producers with retail aspirations.
“We could open stores, but we couldn’t dispense product that is created by our company,” said Alan Gertner, chief executive of Hiku Brands Company Ltd., which was recently formed by the merger of Kelowna-based grower DOJA Cannabis Company Ltd. and Tokyo Smoke, a retail-focused cannabis brand.
There are still opportunities for Tokyo Smoke coffee shops in B.C., Gertner said.
But his company will be in the odd position of having to sell only competitors’ product.
The rules won’t only affect retail-focused companies like Hiku. Large LPs like Canopy Growth Corp. have been looking to expand their retail presence with Tweed Main Street stores. Aurora Cannabis Inc. just spent $103.5 million to acquire a 20-per-cent share in Liquor Stores N.A. Ltd., with the plan of transforming stores into dispensaries. Liquor Stores operates mostly in the Alberta market, but also has stores in B.C.
Keeping these big players out of the B.C. retail market seems to be the rationale behind the retail-producer firewall. According to the government application guide, “This restriction ensures that the market remains diverse and larger participants do not consolidate and control the market.”
However the rules could negatively impact smaller players too.
“We’ve had our ability to interact with an end user restricted, and to me that is a severe compromise not only for a free and open marketplace … but especially smaller producers,” said Dan Sutton, CEO of B.C.-based Tantalus Labs, a midsize grower based in Maple Ridge, that had been considering entering the retail market.
It could prove even more problematic for the thousands of smallscale growers in B.C. who were hoping for a sales model similar to vineyards and craft beer distilleries, said Tousaw.
“The federal government has done a great job bringing in these micro-cultivators … But the provincial government has put the brakes on that by saying, ‘look, you can’t have a vineyard model here, you’re going to have to sell to the wholesaler’,” Tousaw said.
“The problem with that is the wholesaler is probably not looking to buy a pound or two at a time, and a small cultivator may not have the ability to grow enough to get into the wholesalers,” he said.
The B.C. government has indicated it may “may create exceptions in the future to support micro-producers.” The timing around this, however, remains unclear.