Bill Blair (right), a former Toronto police chief who is now one of two parliamentary secretaries to the minister of justice, was assigned the cannabis legalization file by Prime Minister Justin Trudeau.
Is the Canadian cannabis experiment a failure? Things may look rosy on the surface, but underneath, Canada’s legal cannabis regime is struggling. Whether it’s smaller craft producers sending half their profits to the federal government in excise taxes or larger producers racking up a record amount of losses. For many, the Canadian cannabis experiment is a failure.
The Canadian cannabis experiment’s biggest failure comes from excise taxes. Since the government claims activities like smoking or drinking are morally degrading, they are subject to “sin” or excise taxes. This tax takes $1 per gram off wholesale flower regardless of production costs or retail price. So if you’re producing wholesale cannabis at $8 per gram, and your competitors are producing cannabis at $10 per gram, you’re paying a higher tax for being more productive and efficient.
Furthermore, large licensed producers can absorb excise taxes more than smaller producers. All they have to do is sell cannabis at a loss and wait for their smaller competitors to starve.
“I think it probably speaks to how unhealthy the funding side of the industry is,” says Nawan Butt, Portfolio Manager at Purpose Investments.
“If you take a look at the largest players, the amount of losses they’ve racked up, even just this year, the numbers are absolutely massive. And the reason is, they can tap equity markets at any point that they want, helping them absorb these losses and try to maintain market share until the point where it’s survival of the fittest or survival of the fattest, in this case.”
Smaller niche players are finding their market share. But without the volume to increase their margins, they’re left alive only due to tax breaks and flexibility offered by the Canada Revenue Agency.
“The healthy players are unfortunate to be in such a position because the larger LPs just won’t allow them to realize the value that they’re creating in this environment. Because they have an almost unlimited bank account they can tap on. Which is to the frustration of the smaller LPs,” says Nawan.
The large licensed producers (LPs) represent the biggest failure of the Canadian cannabis experiment. They originate from the unconstitutional medical cannabis regime former PM Stephen Harper tried to set up. These large-scale pharmaceutical companies now sell to recreational and medical customers.
They’ve never been cash flow positive. Before legalization, large LPs inflated the potential of the cannabis market. They forecasted record numbers based on nothing at all. Canada’s top LPs, like Canopy and Aurora, indicated sales more than triple what the government predicted. Aurora claimed it would grow a third of Canadian cannabis. And despite a supply gut in the legacy market, Aurora kept building greenhouses.
“If you take a look at the top players in Canada, take a look at where their stock prices are compared to where their all-time highs were, and we’re taking a look at losses 99 cents on the dollar,” says Nawan. “It’s all to the determent of the equity holder for the LPs. And I’m surprised more equity holders aren’t appalled at some of the decisions management have taken.”
Government Bureaucracy Ruined the Canadian Cannabis Experiment
It’s clear the federal government’s bureaucracy ruined the Canadian cannabis experiment. It was a failure before the first retail store even opened. “My experience working in government is people who work in government know what they’re doing. This is a program that’s designed to fail. No one in the government wanted legalization of cannabis,” says David Hurford, Volunteer Secretary at the BC Craft Farmers Co-Op.
As early as 2016, Justin Trudeau said the Canadian cannabis experiment was not about “creating a boutique industry.”
And that’s clear with plain-packaging rules, inaccurate warning labels, and the big red “THC” label on all cannabis products (including CBD-only strains). Or by having a producer application process requiring tens of thousands of dollars in start-up capital, having provincial monopolies as distributors, and, in some provinces, crown corporations handling all retail.
“I think the world is watching the Canadian experiment and we are not giving them positive signs on how to conduct this business,” says Nawan.
Future of the Canadian Cannabis Experiment
“I think the Canadian market is still a very long way from its ultimate stage. There’s a lot of work that still needs to be done,” says Nawan.
What kind of work? For starters, excise taxes are crippling the industry. Unlike other “sinful” industries, the government levies the tax on manufacturers, not retail. If the government wants to call cannabis consumption immoral and tax people for it, it should impose no more than 10% of the retail price.
Second, politicians can scale back government bureaucracy. Give provinces more power and eliminate Health Canada‘s involvement with recreational cannabis. Giving each province more responsibilities can ensure a Canadian cannabis experiment that works for everyone. Places like British Columbia can have their boutique industry while Quebec can continue its strict anti-business, public health approach.
Third, reform the licensed producer system. Again, production licenses are something that the federal government can hand to the provinces. Something has gone wrong at the federal level. Or it’s been designed to fail. Either way, this is not how you legalize cannabis.
“If we look at some of these US players, they’re the ones doing it right,” says Nawan. “They’re the ones that have tight belts and can execute, as well as scale in this environment where they don’t really have equity markets to tap. They’re making the most of what they have, and I think Canadian LPs have a lot to learn from them.”
“I’m just very disappointed that it’s been almost four years of legalization now and our top five LPs have yet to turn a profit.”
If that doesn’t indicate the Canadian cannabis experiment is a failure, then what does?