Ontario's Mismanagement Of Cannabis Business Could Be Fatal
Licensed stores have had to invest heavily in real estate, security systems, and application fees while the OCS continues to be their sole distributor, primary supplier, and main competitor.
Business

The Bleak & Tangled Reality Of Ontario’s Cannabis Industry

Licensed stores have had to invest heavily in real estate, security systems, and application fees while the OCS continues to be their sole distributor, primary supplier, and main competitor.
Business

The Bleak & Tangled Reality Of Ontario’s Cannabis Industry

Author James Eason
Published Nov 03, 2021
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Cannabis has proven itself to be a lucrative and booming market in many regions of the world. Despite challenges with financing and licensing, it appears to be a business juggernaut. But as with all too many lucrative endeavors, greed and corruption can quickly lead to its ruin. The cannabis outlook in Ontario, Canada, has been following that path, leading to a surprisingly grim current reality.

One retail location, the Ontario Cannabis Store, was initially intended to be the sole retailer and distributor of cannabis in the province. But Ontario Premier, Doug Ford, made one critical change: the OCS would be the exclusive e-commerce retailer while private companies would operate brick-and-mortar stores. The measure was a stopgap to ensure all Ontarians had access to legal cannabis while retailers built physical stores. Now, three years later, complications have ensued.

Licensed stores have had to invest heavily in real estate, security systems, and application fees while the OCS continues to be their sole distributor, primary supplier, and main competitor. One benefit to having the Ontario Cannabis Store as the sole supplier is that prices are fixed for everyone. If retailers could purchase from producers, the larger chains could undercut the competition.

Regulations restricting licensed producers to owning up to a maximum of 25% stake in a retail store haven’t prevented abuses. Acquisitions of small-batch cultivators are rampant. Canopy Growth has franchised Tokyo Smoke. Alberta-based licensed producers Sundial Growers have already purchased Spiritleaf and are in the process of finalizing their acquisition of Alcanna, which owns and operates Value Buds. Many of the obstacles and abuses are more directly connected to and originate from the Ontario Cannabis Store.

While OCS sells products to retailers based on its retail price, it still profits from wholesale. Retailers, who pay rent, utilities, security, labor costs, and credit card processing fees are at a distinct disadvantage. The adage of “business is about volume” falls apart when a half dozen stores are in a two-block radius, and the Ontario Cannabis Store is the sole delivery option. With 1,000 licensed stores and 80 new licenses a month, the market is well saturated.

During the spring of 2020, in the thick of the pandemic lockdown, OCS offered free delivery throughout Ontario and later provided same-day delivery in select cities for an $8 fee. Because of the lockdown, the government loosened delivery rules for retailers a tad, but not without restrictions. Retailers’ deliveries had to be executed by a store employee; Ontario Cannabis Store could use third parties; Retailers could only handoff to the person who placed the order to verify credit cards and IDs; Retailers had to complete all deliveries by 8 pm (employees returned uncompleted deliveries to the store); and OCS could deliver until 11 pm.

Like many cannabis markets, Ontario’s customers are looking for one of three things: value, premium product, and high-end product. But the OCS hoards high-volume products for e-commerce, leaving stores out of stock. Additionally, stores can’t stockpile because the Ontario Cannabis Store places limits on brick and mortar stores’ purchases. Lastly, OCS requires cash-on-delivery – AKA the payment is taken from the retailer’s account at the time of delivery without the option of payment terms. Retailers have incredibly tight profit margins given all of their varying expenses and must control their inventory rigorously in order to ensure those payments can be made. As if there weren’t already enough hurdles for small cannabis businesses in the province, the Ontario Cannabis Store doesn’t rotate stock frequently enough to ensure retailers are receiving the freshest product.

Perhaps the most significant obstacle for smaller retail cannabis operations, though, is the startup cost. Not only is there a $6,000 application fee for the Retail Operator License but there is also an additional $4,000 Retail Store Authorization fee required after approval. Once those fees are taken care of and the store hires workers, there’s then an additional cost to apply for a manager’s license. Retail store managers oversee staff, count inventory, place orders, etc. Despite being an employee, the AGCO requires a $750 application fee, a $20 criminal background check with Toronto police, and a $25-$30 credit report. Quite a bit of scrutiny for a retail employee who wants to be in a management role that typically pays $50k – $70 per year.

Cannabis officials claim that the bureaucracy is necessary to prevent people from using the legal market to provide for the underground market. But the illegal, unlicensed, unregulated market has, and continues to, succeed without any connection to Ford’s poorly built, poorly managed legal cannabis market. Everything consumers want – advertising, marketing, packaging, THC levels in edibles – can be found on the illegal market.

These operations are severely hampering licensed producers in Ontario, other parts of Canada, and the United States. Razor-thin profit margins, supply chain hoarding, licensing fees, and oversupply in the legal market threaten to destroy Ontario’s cannabis industry before it can truly take off.

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