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Marijuana sales plan a 'missed opportunity' in Ontario

Director of Quality Assurance Thomas Shipley inspects drying marijuana plants before they are processed for shipping at Tweed Marijuana Inc in Smith’s Falls, Ontario. (Reuters)

Ontario’s plan to sell recreational marijuana through dozens of government-controlled outlets “is grossly insufficient” in meeting consumer demand and will “encourage” the growth of the black market, experts say.

Finance Minister Charles Sousa, Health Minister Eric Hoskins and Attorney General Yasir Naqvi revealed the details of the rollout Friday, which will see 40 LCBO-run marijuana stores — separate from its liquor vending locations —  in place across the province by next July, with that number rising to 80 in 2019 and 150 in 2020. A government website dedicated to online sales is in the works for 2018.

The move will also result in the shuttering of pot dispensaries that have popped up in cities across the province.

The Liberal government said the plan will allow the LCBO to sell marijuana at competitive prices, snuff out the black market and boost provincial coffers through tax revenues.

“When it comes to retail distribution, the LCBO has the expertise, the experience, and the insight to ensure careful control of cannabis, helping us to discourage illicit market activity and see that illegal dispensaries are shut down,” Sousa said Friday.

However, experts are skeptical that the distribution model will have its intended effects.

‘Grossly insufficient’

Anindya Sen, a professor of economics at the University of Waterloo, told Yahoo Canada Finance that he is “disappointed” the province didn’t utilize the existing marijuana dispensaries and that the number of planned LCBO-run stores won’t be enough to meet consumer demand.

“That’s grossly insufficient to service market,” he said.

“My concern is that the objective of making (dispensaries) illegal is to stamp out the illicit market, but this will do anything but stamp out the illicit market, in fact, it will encourage the growth of an illicit market because there’s simply not enough stores.”

Last fall, Deloitte estimated that the base retail market for recreational marijuana in Canada could be worth between $4.9 billion and $8.7 billion a year.

Canada’s PBO has estimated that 4.6 million Canadians will consume more than 655 metric tonnes of marijuana next year.

This dearth in supply will prompt some dispensary owners to operate without government approval, Sen added.

He said that it will also take time and “a lot of money” to set up these new government-controlled outlets.

Missed opportunity

Rosalie Wyonch, a policy analyst at the C.D. Howe Institute, echoed Sen’s concerns, saying that there are at least 100 marijuana dispensaries and delivery services currently operating in Toronto alone, and the Liberal government’s plan misses the opportunity to take advantage of that foothold in the market.

“It’s just incredibly unlikely that 40 (government-controlled) retail locations will possibly crowd that out,” she said.

She added while the promise of online delivery is “better than nothing,” convenience should be a priority.

“If the analogy is a bottle of wine and you were going to a friend’s dinner party, and you think on the way ‘Oh, I should pick up a bottle of wine,’ well, that option will not likely be available with recreational marijuana just due to the less than a tenth of the amount liquor stores,” said Wyonch, noting that there are more than 651 LCBO locations across Ontario.

Wyonch said the dispensaries could’ve been licensed and regulated by the government, rather than being turned into black market competition.

“Instead, we’ve got these hundreds of business of owners and all their employees potentially facing penalties if they chose to continue to operate,” she said.

“The levying of these penalities will require significant justice and police resources, so to me it’s just a missed opportunity that we could’ve avoided that altogether by bringing those retail storefronts into a competitive, legal market.”

Wyonch added that since the these government-controlled stores will have no legal competition, there’s essentially no incentive to constrain their operating costs, which could, in turn, inflate prices and make it harder to compete with the black market.

On the other hand, she said private dispensaries would’ve have been directly forced to keep their costs low and in line with other businesses.

Wyonch said this could further hamper legal producers who may be forced to charge higher prices thanks to expenses such as tests for contaminants and pesticides, while those in the illicit market may bypass these safeguards altogether.

The continued existence of the black market also means the province can’t effectively enforce other regulations such as the minimum age of consumption, which was set at 19 years old as part of the announcement, she added.

“Really I see the choice of few retail outlets and the choice to not leverage the existing businesses as something that will not only increase government costs but ensure the continuation of the black market,” she added.

“To choose a crown corporate with exactly zero competition will really not serve public benefit because of the health concerns that will continue to persist as long as there isn’t full legal coverage of the market.”

Both Wyonch and Sen said Ontario’s plan may decrease its potential revenue from recreational pot.

Wyonch said because the government won’t be able to offer the same reach as the black market, it is curbing its ability to sell products.

“They’re kind of hampering their own ability to generate revenue, because unless people switch to legal supplies they won’t be getting any revenue, and … this choice of business model with the potential to inflate retail prices actually decreases the fiscal room that province would have to levy taxes,” she said.

Alternative methods

Wyonch would’ve preferred if the LCBO or another provincial organization was used as a distribution centre for marijuana that was registered by Health Canada and dispensaries were given the opportunity to legitimize their businesses.

She said this would’ve transitioned a number of stores out of the black market and resulted in broader coverage of the province.

Alternatively, Sen said Ontario could’ve opted to auction operating licences to entrepreneurs who wanted to set up independent retailers.

“I think that would’ve been efficient,” he said.

“I think the market would’ve borne the risk and we would not have been in the position of the government entering the market and basically incurring a significant amount of expenses to set up stores across the province.”