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NOVA Cannabis in Edmonton, Alta. on April 4, 2019.Ryan Jackson/The Globe and Mail

Part of cannabis and small business and retail

When it comes to cannabis, Ben Fizer knows exactly what type he likes. But in order to buy it from a licensed retailer, he needs to show up early on delivery day, before supplies run out.

“I go after the high THC. They run out really fast every time,” said Mr. Fizer, a 26-year-old Edmonton resident.

“I come every Thursday because I know it’s going to be here. With a lineup like this, it will only last for the day.”

He leaned against the wall at Nova Cannabis’s busiest Edmonton store, joining a growing crowd of regular customers who wait, hands in pockets, for the weekly delivery of dried flower to arrive.

Mr. Fizer is like many cannabis consumers who want to buy legal marijuana that is high in tetrahydrocannabinol (THC). THC is the psychoactive compound in cannabis that creates the high sought by many long-time smokers who are trying to do exactly what the government wants: turn their backs on dealers to buy legally grown – and taxed – marijuana from licensed stores.

But nearly six months into legalization, the industry has a problem. Many consumers want high-THC pot at a good price, and may be willing to get it legally, but licensed producers can’t provide enough of it. The mismatch in supply and demand has left the black market firmly in control of the country’s marijuana market, and there’s no sign that will change soon, while producers struggle to meet investors’ lofty financial expectations.

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James Burns, CEO of Alcanna Inc. poses for a photo at NOVA Cannabis, one of Alcanna's businesses on April 4, 2019.Ryan Jackson

Take Nanaimo, B.C.-based Tilray Inc., one of Canada’s top growers. Sporting a market value of nearly US$6-billion, the company reported fourth-quarter revenue of just US$15.5-million, a net loss of US$31.0-million, and revealed it had to purchase cannabis from other suppliers to meet sales commitments.

Cronos Group Inc., which landed a $2.4-billion investment by tobacco giant Altria Group Inc. in December and has a market value of about $8-billion, reported net revenue of $5.6-million in the fourth quarter.

Investors are keeping a close eye on the industry’s biggest players, such as Aurora Cannabis Inc. – with a massive state-of-the-art growing facility in Edmonton -- to see if they can keep up with demand. Aurora, which said it has captured roughly 20 per cent of the nascent market, spooked investors and analysts in early January when it forecast about $55-million in revenue for its first quarter of legal recreational sales.

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Empty shelves in the vault at at NOVA Cannabis.Ryan Jackson

Health Canada data show that sales of dried cannabis fell to 7,115 kilograms in January, down 3.7 per cent from the previous month and the lowest since October, when retail legalization kicked in mid-month.

When it became clear last October there was not enough legal pot to consistently stock the current retail outlets, many people looked to Canada’s licensed marijuana producers for answers. While many in the industry and government did not expect supply to meet demand out of the gate, the country’s growers clearly under-delivered on their commitments to provincially run wholesalers.

When the federal government started down the path of legalizing cannabis for recreational use, one of its stated goals was the elimination of the black market. But the period since the end of prohibition on Oct. 17, 2018, has been riddled with growing pains, most notably a national cannabis shortage that almost immediately led to reduced opening hours at some provincially run stores, the sale of some independent stores to bigger chains, and a pullback of retail licensing in Ontario and Alberta.

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NOVA Cannabis gets a new delivery every Thursday and customers line up to buy the product with higher THC levels before it sells out the same day.Ryan Jackson

The shortage means legal producers are capturing just a fraction of the overall market for pot. Canadians spent $5.9-billion on marijuana in the final three months of 2018 on an annualized basis, according to Statistics Canada. But only about 20 per cent was spent on legally produced cannabis.

It’s not that cannabis stores are completely sold out of products – many strains are available across the country. But consumers can’t get enough of the strong stuff, and many are balking at high prices for legal weed.

The supply shortage is a chronic problem for Alcanna Inc., which owns five Nova Cannabis stores in Alberta.

“We get product delivered once a week on a Thursday and the bulk of what people want is gone in the afternoon and then we have nothing for the next six-and-a-half days,” said Alcanna chief executive James Burns.

“People try to tell you there is no supply shortage. Come see our vault. This is normal,” Mr. Burns said at the Edmonton store, pointing to empty shelves designated for dried flower products. Other shelves were filled with various oils that he said “the high-THC market doesn’t want.”

When a delivery of 15 kilograms of dried flower arrived at the store, a line of 20 people moved toward the counter and doubled in length by lunchtime.

“They literally know the delivery day. They call the day before to ask what we’re getting,” said Grant Sanderson, regional manager for Alcanna’s cannabis division in Edmonton.

Caleb Dublanko, customer experience representative for the store, stood in the vault as cashiers called out orders. He grabbed the small, child-proof containers just moments after they were placed on shelves and handed them to cashiers through a small square opening while answering the phone.

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Customer experience representative Asha Stalker, 20, left, and store manager Chris Ianson counts a new shipment of cannabis.Ryan Jackson

“We’ve got it and we’re selling right now. I would get here sooner than later,” he said to one caller, before hanging up and handing the next order through the vault’s small opening.

By the end of the day, this one store sold out of all 26 dried bud products, or 3.75 kilograms, much of which was high in THC. This left them with the bulk of the order – milled flower with moderate THC levels – that is available in relatively large quantities and ensures the store will have dried flower to sell throughout the week.

Prices are also an issue for the marijuana industry. Retail prices for high-THC flower run upward of $10 a gram or higher. Crowdsourced data collected by Statistics Canada show an average price of $6.91 a gram, implying that cannabis purchased illegally is significantly cheaper. Some pot smokers say they pay about $6 to $8 a gram on the black market.

Licensed producers are focused on increasing growing capacity and reducing costs. But many are facing challenges to increasing production on a much larger scale.

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Driver Mohinder Katodia, left, looks on as Nova Cannabis employees (from second left) Caleb Dublanko, Chris Ianson and Asha Stalker sort through the Edmonton store's weekly delivery as customers wait inside.The Globe and Mail

“Cannabis is such a finicky plant that there are a lot of moving variables when expanding production. It creates all sorts of unseen problems to deal with once it expands,” said Jason Zandberg, cannabis analyst for PI Financial in Vancouver. Those variables include getting all the air circulation and humidity levels right in order to grow thousands of more plants under one roof.

Ramping up production is not like doubling a cooking recipe. Simply multiplying factors needed in cannabis production, such as the number of fans and amount of moisture in the air, does not necessarily equate to the same ideal environment found in smaller enclosures. Additionally, high-THC plants require extra husbandry.

“The supply shortage is universal across all categories. The demand is what’s causing a shortage in high-THC, because that’s of course the most popular type,” said Tom Adams, managing director and principal analyst for BDS Analytics.

“Methods of growing quality cannabis are known, but closely guarded by growers that are used to growing hundreds of plants, not thousands of plants.”

Still, “from a business perspective, there’s a silver lining to product shortages, which is that demand is so high that prices are likely to remain high and margins high for some time,” Mr. Adams said, adding that prices will fall when supplies increase, as has happened in other markets where legalization occurred.

BDS Analytics’ point-of-sale data, for example, show cannabis prices in Oregon and Colorado fell to roughly US$4 a gram in February, 2019, compared with US$7 in early 2015.

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Philip Camfferman, 34, left, buys cannabis at NOVA Cannabis.Ryan Jackson

Canadian growers have also had to learn what it takes to be full-on consumer products companies.

"All the LPs, including Hexo, generally underestimated the amount of packaging infrastructure and logistics and employees and space that it would take to actually do fulfilment,” said Sebastien St-Louis, CEO of Hexo Corp., during a recent earnings call.

“It’s one thing to grow this product, it’s one thing to bag it in giant bags. But by the time you think about putting it in individual multi-line products, that’s quite complex.”

As more pot stores open, shortages could grow even worse.

When all 25 licensed stores open in Ontario in the province’s first wave of cannabis retailers, they could buy as much as 2,500 kilograms of cannabis monthly, according to calculations. For context, this equates to 35 per cent of total sales across the country in January, the most recent data.

In November, Alberta imposed a pseudo moratorium on new retail licences due to low supplies. Pot stores in Quebec are shut three days a week due to low availability and Ontario has so far made only 25 retail licences available through a lottery process.

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Customer experience representative Melissa McLeod, 35, hands out cannabis from the vault next to a clipboard noting all the product that is sold out.Ryan Jackson

Some cannabis executives say consumer tastes may shift in their favour.

“While high THC is currently in strong demand, we believe consumers are coming around to other factors such as terpene profiles, that add character and depth to cannabis that’s well worth considering,” said Jay Wilgar, CEO of Newstrike Brands and Up Cannabis.

“High THC levels are not the be-all-and-end-all, and education is helping spread the word on this, slowly but surely.”

It’s a message echoed by other LPs.

“THC, in my view, is a misunderstanding by the consumer. A lot of the time you get a more desired result from mid-THC,” said Theo Zunich, CEO of Solo Growth Corp., adding he has been a cannabis consumer all of his adult life.

The wide variety of terpenes found in different strains change the effect, he said. Terpenes are naturally occurring oils in cannabis that carry a range of aromas such as lavender, citrus and pine.

Many companies are also waiting on the second wave of legalization, expected this fall, which will introduce a new slate of legal cannabis products, including vaporizers, edibles and creams. Companies are building up considerable stockpiles of cannabis concentrate, extracted from their lower quality flower and trim – the leftover stems and leaves.

The hope is that new product forms, already popular in the black market, will help woo hesitant consumers to the legal space. Vapes and edibles will also give LPs another sales channel for low quality cannabis grown at industrial scale, once they have transformed it into concentrates.

Eventually, some experts say, the Canadian marijuana industry will figure out its production challenges and meet the country’s demand for high-THC and other types of pot.

PI Financial’s Mr. Zandberg expects these growing pains will take about two years to overcome, and by then, Canada’s cannabis supply shortage will shift to an “avalanche of product.”

For Rick Boles, an Edmonton resident waiting in line at Nova Cannabis who has smoked pot for 40 years and consumes more than a gram a day, that day can’t come soon enough.

“I would much prefer to buy legal weed,” he said. “I smoke weed to get high.”

Available now: Cannabis Professional, the authoritative e-mail newsletter tailored specifically for professionals in the rapidly evolving cannabis industry. Subscribe now.

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