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Pot shops will stock more popular products without Ontario government: BMO

A woman smokes marijuana during a demonstration in support of the legalization of marijuana in Medellin, May 2, 2015. REUTERS/Fredy Builes

Pot stores in Ontario would get more products consumers actually want if the province were to abandon its wholesale cannabis business, according to analysts at BMO Capital Markets.

Last Friday, BNN Bloomberg reported that the Ontario Cannabis Store (OCS) is considering "no longer running the province’s wholesale cannabis distribution business," and the province may be evaluating Saskatchewan's model where licenced producers sell directly to retailers.

“If Ontario transitioned to Saskatchewan's model, we believe the in-store product mix would eventually become better aligned with recreational consumer demand,” BMO analysts Tamy Chen and Peter Sklar wrote in a recent research note.

When asked for comment, OCS spokesperson Daffyd Roderick said the crown corporation’s wholesale and e-commerce distribution operations will continue to serve Ontarians, and OCS “continuously considers how to improve operations and services.”

Chen and Sklar expect a switch to Saskatchewan’s model would “create a challenging transition period,” but ultimately rationalize the number of licenced producers in the industry as prices for dried flower fall faster than anticipated under the current model.

OCS reported a loss of $42 million in its first fiscal year, primarily blaming startup costs. Chen and Sklar said a “sub-optimal product mix” was also a key contributor.

In August, Canopy Growth Corp. (WEED.TO) recorded a gross revenue adjustment of $8 million ($6.4 million after excise taxes), citing the risk of “oversupply of certain oil and gel-cap formats in certain markets.” Chief executive officer Mark Zekulin attributed the company’s weaker-than-expected financial results in part to product mix issues, specifically a lack of high-THC dried flower.

Chen and Sklar said Ontario adopting Saskatchewan’s distribution model would help licenced producers smooth out quarter-to-quarter revenues by eliminating Ontario’s “pattern of periodic bulk purchases.”

“We believe the licenced producers with stronger cash positions should be able to better adjust through the transition period and establish an optimal product mix of dried flower and rec 2.0 formats,” they wrote, recommending Canopy Growth and Cronos Group Inc. (CRON.TO)(CRON)

With a file from The Canadian Press

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