Michael J. Armstrong is an associate professor in the Goodman School of Business at Brock University
Data released Friday by Health Canada show that sales volumes of legal cannabis increased 8 per cent in July. Summer sales also demonstrated the importance of a steadily expanding network of bricks-and-mortar retail stores.
That welcome news, along with legalization’s first anniversary next week, make it all the more timely for federal and provincial governments to review their respective cannabis strategies.
July’s strong overall growth was due to dry cannabis sales climbing 14 per cent to 11,387 kilograms. Both recreational (9,747 kg) and medical (1,640 kg) volumes increased.
By comparison, cannabis oil volumes rose only 2 per cent to 9,854 litres and remained below their peak in May. Recreational sales grew to 5,558 litres – but that gain was largely negated by medical sales falling to 4,296 litres.
July was the second month of this oil divergence, implying that many oil users were switching suppliers. It's possible some medical users prefer the physical stores and/or wider product selections that recreational vendors offer.
CannTrust presumably also contributed to the switchover by halting sales in July. The company had been serving 72,000 registered medical clients, about a fifth of the national total. Given a sudden need to find new suppliers, some likely shifted to the recreational market.
The shift in oils and growth in dry products boosted total recreational volumes by 14 per cent, the fifth consecutive monthly expansion. July’s legal recreational sales consequently accounted for about 20 per cent of Canada’s estimated 77,000 kg monthly cannabis consumption.
Total medical volumes, by contrast, shrank to just 8 per cent of estimated national demand.
July’s sales growth is partly attributable to continuing production increases. Dry cannabis processing rose 4 per cent in July to 19,738 kg, staying well ahead of distributors’ demand.
Evolving business strategies might also have contributed. For example, in summer 2018, producers stocking-up for legalization could only guess at consumers' preferences.
However, after seeing autumn's actual demand, they could've updated their winter planting plans. That would've yielded more desirable harvests by spring and better product mixes for summer.
But the biggest contributor to expanding recreational sales was the exploding retail network. Canada's licensed store count surpassed 350 by early July, up 23 per cent from a month before.
Store counts have continued to rise since then, hitting 450 in August and 500 by September. That implies sales also kept growing.
If so, combined medical and recreational volumes could’ve totalled around 22,700 kg in August and 24,100 in September. Consequently, legal products might now hold some 31 per cent of the national market.
Given retailing’s demonstrated importance, British Columbia, Quebec and especially Ontario need more stores to reach their large populations.
In this regard, Ontario's Chamber of Commerce was right last month to push for clear timelines for additional store licensing. Unfortunately, the provincial government is reportedly too busy rethinking its role as a wholesaler to pay attention to the future of its retailers.
Retail expansion does, however, involve a trade-off.
Consider Quebec's already-profitable cannabis agency. Its outlets each averaged around $940,000 in monthly sales last summer. Ontario's private retailers likely performed similarly well.
But the high sales per store were largely due to having few stores per capita. And that store scarcity meant legal cannabis captured merely a fraction of each province's demand.
By contrast, Alberta and New Brunswick have far more retailers per capita, letting legal cannabis seize bigger market shares. But New Brunswick's outlets averaged just $150,000 each in monthly sales, while Alberta's shops did only slightly better.
So, low store density is good for individual stores’ profits. But the public-policy goal of competing with black markets requires wide retail access.
New Brunswick’s government should ponder that paradox as it considers shrinking or privatizing its money-losing agency. Conversely, Quebec should realize that it needs more outlets to pursue its policy objectives.
With legalization's first anniversary next week, it's timely for governments to review their cannabis strategies. That particularly applies to whichever party leads the next federal government. But the resulting adjustments should reflect their new-found experience, not merely their ideological reflexes.
Michael J. Armstrong is an associate professor in the Goodman School of Business at Brock University.