The Illicit Cannabis Market vs. the Legal Cannabis Market – What We Can Learn
It is well-known that the regulated cannabis industry directly competes with a well-established illicit market, and eliminating the latter is central to Health Canada’s cannabis objectives. Unfortunately, since legalization, provincial distributors of recreational cannabis report a deficiency of cannabis from Health Canada licenced sources that genuinely limits the regulated market. In November, the government of Alberta instituted a surprise freeze on issuance of new cannabis store licences, and other provincial governments have limited the operating hours of their own stores due to lack of supply. At the same time, reports trickle from the unregulated market that availability of illicit cannabis is unaffected by new competition from the legal market. The unregulated market has an established system of suppliers and consumers, some of which have no intention of converting to the legal market. To some, joining the regulated system is viewed as unnecessary effort and expense to continue a business they’re already operating successfully. Lack of funding, rigorous security investigations, and long assessment timelines are cited as barriers to transitioning to the legal market.
What will it take for the regulated industry to ultimately displace the black market? Support from government and law enforcement is paramount, and we’ve seen increased enforcement of provincial licencing for recreational cannabis stores. Last Fall, Ontario started with a strong warning that cannabis businesses operating illegally after October 17th would be barred from applying for provincial licences (despite this, 28 unlicenced dispensaries are reported to remain open in Toronto), and the B.C. Supreme court ordered unlicenced stores to close in December. We’ll likely see more enforcement against unlicenced stores and illegal grow operations as more legal businesses come online.
We also see cultivators, processors, and sellers of legal cannabis in positions of power to shift consumers from existing relationships with unregulated dealers to obtaining cannabis from legal sources. Licenced businesses have a genuine opportunity to lead the legal industry’s collective challenge to the black market by setting precedents for what consumers can expect from the regulated sector moving forward. Consistent and convenient availability of a selection of high-quality legal products at competitive prices seems the best chance to bring consumers to regulated sources, but the opportunity to lead goes deeper than simply winning market-share.
As the original consulting firm to offer a breadth of cannabis services in the regulated consumer products industry, we are privy to the many challenges businesses face when entering and operating in regulated systems. In regulated facilities, businesses can’t do everything they want, so for teams already running successful unlicenced businesses, processes will need to change. Regulations weren’t created to limit the growth of the cannabis industry, but to guide us towards safe access to quality products. GPP (and even more so GMP and HACCP, the latter of which will form the base for quality systems in licenced processors of edible cannabis products) are a series of guidelines tested in parallel industries and, in the case of GMP and HACCP, fine-tuned over decades to mitigate health and safety risks.
Licenced businesses should take pride in products produced and distributed in accordance with the regulations, because these products have passed a system of checks and balances that ensure safety and quality. Regardless of the perceived “quality” of black-market products, most can’t make the same claim. A recent report indicates 80% of cannabis sold through unlicenced dispensaries wouldn’t pass the quality tests required by Health Canada. Although the legal market isn’t immune to quality failures (like mold), it does mandate a system that removes products which are comprised off the market and provides refunds to the affected consumer. In considering what might be viewed as a restrictive system, it’s worth highlighting that regulations are always changing. Typically, the regulator takes a cautious first approach with robust regulations, then, over time, they relax.
To experienced cannabis players sitting on the outskirts of the regulated market – there is room for you. Your voice and experience are needed. Despite a growing pessimism about the number of applications in queue at Health Canada and fingers pointing to a saturation of retail store locations in major centers, there are opportunities to enter the legal market.
We see that existing processors are grappling with new challenges posed by new products, like edibles as the final regulations for edibles, topicals, and concentrates haven’t been published, and product development for these new categories is ongoing. We also see a fair amount of movement in the recreational market as those first to apply fail to complete the application processes.
As encouragingly put by our Chairman, Brian Wagner, “Success for an LP has years to play out. The real winners may not have even applied yet.”
To date, Health Canada has not issued a single licence for micro-cultivation or micro-processing to a file submitted under the Cannabis Act, and the micro licences offer (legal) market entry to smaller scale “craft” businesses. We view these craft businesses as essential to the development of a robust cannabis industry.
Experience from unlicensed growers, retailers, and processors in other markets (e.g. conventional food and grey market edibles manufacturers) offers great value. Although transitioning to the legal system may never be an option for those with a criminal past or zero access to capital, Health Canada and existing licence holders are poised to welcome many experienced individuals with open arms. For the regulated market to compete with an established black market, it will take flexibility and collaboration from both sides. The best framework for everyone will come from the combined experience of our federal, provincial, and municipal regulators; businesses already established in the regulated industry; and those who have yet to join. Let’s get to work.
CCI is a global consulting firm with subject matter expertise in the regulated consumer products industry. The company has a legacy of success based on its knowledge of safety and compliance best practices, enabling the team to provide end-to-end business solutions at every stage of a company’s growth cycle.
Written By: Brenna Boonstra, Director Quality and Regulatory