A key objective of Canada’s cannabis legalization is to squeeze-out black markets. We were reminded last week how little progress has been made toward that goal. But analysis reveals some provinces have made comparatively good starts.
On Friday, Statistics Canada reported that during 2018’s fourth quarter, consumer spending on cannabis averaged $5.9-billion annually, or about $1.48-billion per quarter. Unfortunately, only 20 per cent of those dollars went toward legal cannabis.
The legal market share was even lower when calculated by product volume. That is, when considering the percentage of cannabis that was legal, rather than the percentage of dollars spent on legal cannabis. That’s because illegal pot’s average price of $6.51 per gram was one-third lower than legal products’ $9.70, according to StatCan.
Adjusting for the price difference reveals only 15 per cent of purchases involved legal products. That was split almost equally between recreational and medical users.
Widespread product shortages were the main reason for the small percentage. But some provinces did much better despite those shortages. We can estimate provincial market shares by combining government data from several sources.
For example, StatCan estimates New Brunswick had 117,400 cannabis users last quarter, about 2.5 per cent of Canada’s total. That suggests its cannabis market was worth around $37.4-million quarterly.
StatCan also says New Brunswick had $8.5-million in legal retail sales that quarter. Health Canada’s most recent data indicate the province’s residents buy 2.8 per cent of Canada’s medical cannabis. That’s roughly $4.2-million quarterly. So, total legal cannabis purchases there totalled some $12.7-million.
After adjusting for price differences, it appears medical cannabis sales constituted 8 per cent of New Brunswick’s market. Legal recreational products captured another 15 per cent by volume. Together those gave legal products 23 per cent of the province’s market volume, significantly beating the Canadian average.
Similar calculations give each province’s legal market share by volume as follows. (Manitoba and the territories are omitted because StatCan didn’t report their quarterly sales.)
One explanation for the wide provincial variation is the availability of retailers. Alberta and the Atlantic provinces offered relatively convenient shopping, with at least seven stores per 100,000 cannabis users. By contrast, other provinces had relatively few shops last quarter; Ontario had none.
Since then, Saskatchewan has boosted its store count. The remaining provinces should too. Just to catch up, B.C. needs to grow from 15 stores to 40, while Quebec should jump from 12 to 70. Ontario requires 130 but is only licencing 25 this year.
(Quebec perversely is reducing retail access instead. By increasing its legal age to 21, it’ll ban some 80,000 users from its outlets. They’ll presumably return to the black market.)
Meanwhile, PEI credited relatively good product supplies for its chart-topping recreational sales. As cannabis production increases nationally, other provinces could see similar success.
Medical sales also contributed to provincial differences. Ontario and Alberta together have 78 per cent of Canada’s registered medical cannabis clients. Their purchases boosted those two provinces’ legal sales.
Pricing is another factor. Quebec’s cannabis agency charged only $7.27 per gram on average, much less than elsewhere. That made it more competitive with illegal vendors, and likely helped compensate for store scarcity.
The federal government could help with pricing. Its excise tax currently is 10 per cent of wholesale value, with a minimum of $1 per gram. Ottawa should delete that minimum. That would make it easier for value-priced products to compete against illegal pot’s $6.51 price.
That matters, because the important competition is not among provinces. Rather, it’s between legal and illegal suppliers. The federal and provincial governments all must ensure their policies support the developing legal industry in that challenge.
Michael J. Armstrong is an associate professor in the Goodman School of Business at Brock University.