EDITOR: | October 11th, 2018

Weighing in on the legalization of recreational cannabis in Canada

| October 11, 2018 | No Comments
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With only a matter of days until recreational cannabis is legalized here in Canada, coming up with a viable plan as a consumer as to where to source cannabis products is looking like it will be a challenge.

Provincial legislation is varied with respect to the distribution of cannabis in Canada. These inconsistent public/private frameworks are leaving a varied landscape of availability of goods to the consumer come October 17th. So, as a consumer, where would you be most likely to expect to find a retail source? You could buy a ticket to the east coast since, according to BNN Bloomberg, the maritime provinces are boasting 60 storefront locations on October 17th. If one of the maritime provinces is not your local area, you will be restricted in what you can get and where you can get it.

While in Ontario there is no framework yet for brick-and-mortar businesses (not expected until April 2019), in Alberta, there are a total of 17 stores that are municipally and provincially-approved, with only two of those existing in the Calgary market, per the AGLC. Similarly, CBC reports that there will be only one BC cannabis store open in the entire province on day one (in Kamloops), with more than 100 applicants in the pipeline. While many are in the review process, getting an approval for brick-and-mortar in BC is said to take up to 18 months. For example, Kelowna will likely not see its first retail locations until Summer 2019 as a result of permitting and rezoning processes. In similar fashion, Saskatchewan will see only four of the original 51 licensees open for business on October 17th, with lack of clarity on the readiness of a handful of other businesses.

Visions of early-morning line-ups at Apple stores come to mind as demand potentially outstrips supply on October 17th and consumers plan to line-up early just to have a chance to legally purchase some flower. With these potential line-ups come security concerns and policing needs. For instance, secondary markets could pop up outside these stores as the early buyers sell off excess at higher prices to those unwilling to wait in long lines.

While the red tape and bureaucracy of licensing businesses is a timely process, it may benefit the retailer in the longer-term. Had all retail locations, or a majority, been available to open on October 17th, the existing supply of cannabis and derivatives would be thinly stretched, amounting to little choice for the consumer. PI Financial Analyst Jason Zandberg notes that only 30-60% of demand will be met through current and near-term production until large production facilities such as Aurora’s expansion come online over the next year.

For the businesses that will be open on day one of recreational legalization, supply contracts will be important in realizing how successful the first day could be and may also set the go-forward tone on how consumers view branding, for instance. There is a strong possibility that the pent-up demand may exceed the capacity to serve and provide customers with product in person. Although online sales will be available, the instant gratification that is provided through retail outlets is lost.

We must remember that these issues will not resolve themselves in a day, or a matter of days. It could be weeks and months before further locations come online due to regulatory approval processes and build-out times. Until then, upstream suppliers will rely on government-owned and operated online marketplaces to reach the consumer. We may also see shifting supply agreements and fulfillment of contract commitments through wholesale flower markets. These supply forces throughout the entire value chain may lead to higher pricing for consumers, just as in Colorado when cannabis was legalized.

One name we like in the retail distribution/dispensary business (and are investors in) is High Tide Ventures. High Tide has been serving Canadian cannabis consumers for a decade, designing retail concepts that speak to them and developing products that they love. Legalization of cannabis in Canada has created an enormous opportunity for growth and expansion in this industry, and High Tide is perfectly positioned to service the flood of demand that’s coming. High Tide is a modern cannabis retailer, the largest counter-culture chain in the country, a global manufacturer of cutting-edge cannabis accessories, a national distributor to retailers across the nation, and the most sophisticated, fully-integrated cannabis enterprise in the country.


Arthur Kwan

Editor:

Mr. Kwan is currently the CEO & Senior Portfolio Manager of CannaIncome Fund, a private investment firm focused on the cannabis sector. In addition, he ... <Read more about Arthur Kwan>


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