Federally Licensed Cannabis Producer System is Keeping Online Black Market Alive

Owners of licensed retail cannabis stores in BC and other Canadian provinces have good reason to gripe about the competition, but they’re not complaining about other BC cannabis retailers: it’s the black market undercutting their pricing that’s causing collective anxiety.

If you’re a business owner, you understand that profit margins depend largely on the wholesale cost of goods sold. When product costs are high, margins are lower, and you attract fewer customers. When product costs are lower, margins are higher, and you attract more customers.

For Canada’s licensed cannabis retailers, profit potential is hindered because there are fewer legal cannabis producers, while online black market cannabis stores, that purchase and sell low-cost, unlicensed cannabis, seem to operate with impunity.

Fewer Cannabis Producers = Higher Costs and a Thriving Black Market

Currently, all legal cannabis producers in Canada are federally licensed by Health Canada. Many are large operations with multiple production sites. There are approximately 500 federally licensed cannabis producers for the entire country. Compare that to the over 700 liquor manufacturers (wineries, distilleries, and breweries) in BC alone.

View the Liquor & Cannabis Regulation branch spreadsheet of licensed BC liquor establishments (sort by “license type” to view the number of manufacturers in BC). BC’s liquor retailers can survive (and thrive) because there are so many liquor manufacturers. Supply and competition keep prices stable.

In Canada, new cannabis producers face a wait list of around 5 years to get a license, and cannabis production licensing requirements are stringent. Producers are not licensed quickly enough to keep pace with the black market. As a result, wholesale cannabis prices from federally licensed producers are not likely to change much in the next few years unless the landscape changes dramatically.

Because there are comparatively fewer cannabis producers for BC cannabis retailers to choose from, wholesale pricing, and thus retail pricing, is significantly higher.

The average price of legal cannabis increased to $10.30 per gram in the fourth quarter of 2019 from $9.69 per gram a year earlier, while the average price of illegal cannabis decreased to $5.73 per gram in the fourth quarter of 2019 from $6.44 per gram in the fourth quarter of 2018.

– Source: Statistics Canada in “Crowdsourced cannabis prices” (fourth quarter, 2019).

If you compare the price per gram of legal cannabis to black market cannabis, the problem is obvious. As you can see from fourth quarter 2018 Statistics Canada data, illegal cannabis is approximately half the cost of legal cannabis.

Hundreds, of illegal online stores continue to operate with little risk of prosecution. A Google search reveals more than 10 pages of black market online stores (we stopped counting at page 10, or 100 search results). Compounding the unfair competition, is that these black market shops sell online, which, in most provinces, licensed cannabis retailers aren’t permitted to do. The government is aware of the problem. BC Solicitor General Mike Farnsworth recently said that “They will be looking at a number of ways of dealing with this right across the country”, though there is no doubt that authorities were aware of the problem prior to legalization. Legal retail cannabis store owners in Canada, who’ve invested money, time and sweat equity acquiring a cannabis license and opening a store, are still “dealing with this right across the country” nearly two years after legalization.

With low prices, a big selection of products, and a variety of online shops to choose from, many cannabis consumers will continue buying from black marketeers.

The Solution

The solution to the problem seems easy enough: clamp down on black market cannabis stores and increase the number of legal cannabis producers in Canada. While a few illegal online stores have been shut down and have faced criminal charges, enforcement is difficult. At the first whiff of trouble from authorities, Illegal cannabis retailers can easily switch to new web hosting providers, rebrand, and move production and packaging facilities. The answer then, must be in creating an environment where licensed cannabis retailers in BC (and other provinces) can make a go of it. That may mean licensing more cannabis producers faster, and licensing different types of producers, such as micro-cultivators who would operate much like craft breweries.

Currently, “craft cannabis” producers must be federally licensed. Allowing provincially-licensed craft cannabis producers, or small batch local producers (similar to members of the BC Vintners Quality Alliance) would help provincial markets grow more quickly. More producers mean more competition and lower prices that could compete with the black market.

We Help Legal Cannabis Retailers in BC & Alberta Thrive

Thrive Liquor & Cannabis Advisors helps cannabis retailers with their market strategy as well as the hands-on work required for cannabis license applications, store set up and training. Working with Thrive Advisors gives you the best chance at success! Contact us for a free 1-hour consultation.