2019 certainly has not been a spectacular year for cannabis in Canada. Early crippling supply issues and other problems have resulted in an industry downturn. To say that things haven’t exactly gone as planned would be an understatement. The worst contender in the Canadian cannabis market this year has been Ontario. The province is home to nearly 40% of the Canadian population. It has performed far below average in terms of sales. The licensing system is a mess. The current system has failed to get the required number of stores up and running. Here is how Ontario botched cannabis legalization (and how they might be able to fix it).
How Ontario Runs Its Cannabis Program
One unique aspect of the Canadian model in general is how much authority the provinces have within their own jurisdiction. Cannabis is no exception. Each province has been given the authority to handle the distribution, licensing and sales procedures. Provinces may also impose further restrictions on certain aspects such as growth for personal use and public consumption. This freedom accounts for a lot of the variation from province to province. It also helps explain why certain provinces have fared better than others.
Ontario allows for private retail stores within its borders, but has implemented a lottery system for issuing retail licenses. Following the October 17th legalization date last year, the Ontario government announced that it would award 25 licenses to sell cannabis. These would be based on the results of a lottery in which private businesses could participate. Lottery winners were then able to apply for a license through the AGCO.
The lottery system was originally justified by the government due to early supply shortages experienced across the country. They had initially planned to go ahead without a cap on the number of retailers in the province. The government insisted that they would eventually move to an open system once resolving supply issues. In defence of the practice, Ontario Attorney General Caroline Mulroney commented in January: “We need to see more stores in place across the province but given the national supply shortage and the amount of supply that we currently have, we believed that we need to do this in an equitable way”.
The province initially approved 25 businesses in January of this year. A second lottery was held in in August, which named 42 more winners who would also be eligible to apply for licenses. Where winners can set up shop is specified by the lottery. The Ontario government also has a number of other regulations in place. These include laws which prohibit licensed producers from owning more than 10 percent of a retail operation.
Problems And Consequences Of The Ontario Model
Many consider the current system to be a complete disaster. In his monthly report on the industry, investment analyst Chris Damas delivered a scathing criticism of the lottery system. calling it a nightmare and commented that “it’s a big disappointment when 40 per cent of the population is not participating in the cannabis revolution”.
There are only about two dozen stores to serve a population of over 14 million. The reality is that Ontario hasn’t issued nearly enough licenses to meet the demand.
What’s worse is that the government has stubbornly clung to the lottery despite the obvious changes to the supply situation. While its certainly debatable whether or not the issue has been completely rectified, there’s no doubt that significant progress has been made. In an open letter to Ontario Premier Doug Ford, the Cannabis Council of Canada stated that “there is ample supply of cannabis for the adult recreational market”.
The group also asserted that the government’s polices were having a detrimental effect on the industry in Ontario. “Our ability to continue to invest and sustain the jobs that we have created is being severely challenged by the province’s current retail cannabis policy framework,” the letter continued. “As Canada’s licensed cannabis producers, we’d like to work with you and your government to leverage the significant capital investment and direct and indirect jobs that we have created in the province”.
All of this has had a major impact on the dynamics of the cannabis market. Alberta has over 200 stores up and running, despite having less than a third of Ontario’s population. This has been a huge missed opportunity thus far for business and entrepreneurship, and has certainly helped contribute to the slump currently facing the industry in Canada.
It has also further exacerbated the problem of the black market, which by some estimates could represent up to 80% of Ontario’s recreational cannabis market.
Despite all of the problems thus far, Ontario officials seem to be aware that something needs to change.
While unable to pinpoint a specific timeline, Premier Ford and Ontario Finance Minister Rod Phillips both recently provided comments. Both hinted at abandoning the lottery system. In his comments on the situation, Phillips stated that “we’ve talked about moving to open allocation once the conditions are right”, with Ford indicating to reporters that the province was ultimately hoping to adopt an open model similar to that in Alberta
The Ford government should move quickly if they wish to tackle the issue. Suggestions put forth by the Cannabis Council of Canada should be taken seriously. These include:
- removing the store caps,
- relaxing restrictions between licensed producers and retailers,
- and opening up the market to more private enterprise (including largely neglected rural areas)
Doing so would likely go a long way in addressing both the black market crisis and the lack of buying options for consumers in Ontario.