Data released Monday show legal cannabis sales growing 12 per cent in August, with these volumes supported by ample inventories and expanded retailing. To ensure that growth continues, Ontario and Quebec must increase their store counts. Meanwhile, federal and provincial governments should simplify excise taxes to help legal products sell at black-market prices.
Health Canada’s numbers indicate that the volume of dry cannabis sold rose 10 per cent to 12,917 kg. Oil volumes similarly climbed 14 per cent to 11,705 litres. Oil’s jump was largely due to a rebound in the sale of medical marijuana, which had slid in the two previous months. The recovery might partly represent customers leaving CannTrust in July and finding new medical suppliers in August.
The numbers also show sales of recreational cannabis continuing to outpace medical purchases. Last November, total volumes of recreational product were barely above supplies of medical pot. By August of this year, recreational retailers’ volumes were 2.5 times those of medical vendors.
The large increases in August sales contrast with even larger decreases in production. Estimated processing of dried cannabis declined 17 per cent to 16,787 kg. Meanwhile, oil processing apparently dropped 42 per cent to 9,236 litres. Despite those cuts, inventories of finished goods and shipments to distributors both remained elevated. This might be an initial sign of industry stability. Since early 2018, producers have been frantically ramping-up output, especially for dry products. It seems that by August, they had finally caught up with retailers’ demand and could ease-off slightly.
That easing helped control their large inventories. Total finished product stockpiles represented 4.8 months of dry cannabis sales and 8.7 months for oils.
Unfortunately, such control wasn't yet evident for unfinished dry cannabis. Those inventories grew another 12 per cent to 328,187 kg. Producers were still reaping what they'd decided to sow several months earlier.
Going into September, sales growth likely slowed due to slower expansion in retail networks. Where August began with 28-per-cent-more licensed shops than the month before, September added “only” another 12 per cent.
This suggests that as legalization's second year unfolds, the simplest way to increase legal cannabis market share is to boost retail access in the underserved Quebec and Ontario markets.
Quebec announced plans earlier this month to double store numbers by spring. With Ontario’s legislature now back in session, perhaps it too will finally announce plans for more stores. (Please, no more ad-hoc licence lotteries!)
Making legal cannabis more price-competitive with illicit weed is another priority. Hexo Corp. provided a good example recently when it started selling one product in Quebec stores for just $4.49 a gram including taxes.
Some analysts were unimpressed, seeing the move as a loss leader or a clearance sale. But while Hexo’s move might appear odd now, it probably represents the industry’s future.
Legal products so far have been overpriced relative to illegal ones. Consequently, they’ve likely attracted the most law-abiding and least price-sensitive users. To entice more typically price-sensitive consumers away from illicit markets, legal vendors need to offer more-typically black-market prices. Every major producer and every provincial market should offer some similarly value-priced products.
This example also highlights how governments can help. Of that $4.49, a whopping 35 per cent is tax. That's because federal and provincial excise taxes charge 10 per cent of wholesale value, but with a minimum of $1 per gram. Sales taxes are charged on top.
So, if the federal and provincial governments really want to shrink illicit markets, they should eliminate the $1 minimum. That simple move would let products like Hexo’s sell for just $3.39 - fully one quarter less.
Because if politicians think legal products can capture most of the market, without prices that appeal to most of its consumers, they must be smoking something pretty good.
Michael Armstrong is an associate professor in the Goodman School of Business at Brock University.