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Business Commentary Will over-regulation of cannabis help sustain the black market?

Part of cannabis laws and regulations

With the legalization of cannabis, the Government of Canada has a range of objectives: protecting children and youth by limiting their exposure and access to cannabis; protecting adult consumers by establishing a secure and high-quality supply of legal cannabis; and diminishing the black-market role in the Canadian cannabis market.

These objectives are interconnected and to a large extent depend on the creation of a legal cannabis regime that offers users convenient access to desirable products.

Shifting adult users to safe, quality-controlled products protects the public and allows opportunities for education around safe usage and potential harms.

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Protecting young people from enticements to cannabis use and restricting youth access to it both depend on reducing or eliminating the black market. As long as the black market operates, young people who are barred from the legal market will be an attractive target for sellers.

Reducing or eliminating the black market depends on shifting adult users to the legal market; this will require legal sellers to respond to users’ preferences regarding retail arrangements and access to products, product types, marketing and so on.

The key to all three objectives – public safety, youth protection and shrinking the black market – is moving enough adult users toward legal regulated cannabis. That transition will depend on the accessibility, convenience and desirability of legal products.

Given these objectives, how does the government’s approach to legalization stack up? First, consider the branding and packaging regulations the government has devised. Based on the tobacco control model, legal cannabis will have to be made available in plain, standardized packaging with warning messages taking up a good portion of the space.

Retail access under the legal regime will be a mix of online and bricks and mortar, with the latter split between government-owned and operated stores, and private retail. The details of retailing are yet to be worked out in many provinces, but Ontario, for example, will have orders placed at a counter with no product in sight, creating a rather sterile consumer experience, reminiscent of alcohol retailing two generations ago. This level of control will make it difficult for brands to differentiate themselves and build market share.

This approach to regulation – plain packaging, non-visibility in retail, no branding – is based on Health Canada’s approach to tobacco control. In the case of legal cannabis, these decisions appear to respond to the concerns of non-users rather than the needs of current and potential cannabis users.

Our research shows that only about one-quarter of Canadians will either admit to using cannabis currently or say they might try it once it is legal. Three-quarters are not interested. These proportions may change somewhat once cannabis is officially legal, particularly as it becomes more normalized in society over time; but rapid, dramatic shifts are unlikely.

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The research also shows that cannabis users have a preference for branded products and a liquor-store-type retail experience, where a range and variety of products are on display and available for purchase. Even at the level of social values – underlying world views and motivations – cannabis users are distinguished from non-users by the importance they place on brands and their expectations of brands. More so than non-users, cannabis users value brand authenticity; they’re attracted to brands that communicate effectively and feed their imaginations by telling true and compelling stories. This crowd also scores high on the value “joy of consumption,” meaning they take pleasure from browsing and buying, even apart from the products they end up taking away and using. For them, the process of shopping and selecting can be as exciting as using the products they buy.

Given this profile of the core user market, using a tobacco-control playbook for the regulation of legalized cannabis may diminish demand for legal products. This, in turn, may leave more room for the black market to continue functioning, meaning that the government may not achieve its objectives for legalization.

Not only is a tobacco-control-based regulatory structure unlikely to appeal to the target audience for cannabis products, it also overlooks the likely shape of the legal market, which research suggests will feature more demand for edibles and other non-combustible products than combustibles, once the former are made legal. It is telling that the Liquor Control Board of Ontario which offers a master-class retail experience for alcohol will, reportedly, be providing a very different (that is, inferior) experience in its cannabis subsidiary.

The government should be careful that the particulars of its regulatory approach don’t undermine the policy objectives that caused it to propose legalization in the first place.

Tony Coulson is group vice-president, corporate & public affairs at Environics Research

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