While Ontario’s legal cannabis industry continues to eat into illicit market sales, progress would accelerate if the provincial pot distributor gave up its online delivery and pricing advantages, private retailers say.
On Thursday, the Ontario Cannabis Store said that between July and the end of September legal sales made up 36.2 per cent of the recreational market, up from 24.9 per cent in the previous quarter.
Although more work is needed to increase legal sales, the OCS said in its second quarter report that forward momentum was driven by increased brick-and-mortar retail access, better product quality and lower prices.
But the legal market would grow at a faster rate if the OCS didn’t pay lower wholesale prices than private retailers, and didn’t have a monopoly on delivery, says Andrew Rhodes, co-owner of The Neighbourhood Joint in Toronto.
“Not only do they have the monopoly on e-commerce and delivery, the price is the lowest on the OCS website most of the time. So they’re stacking the cards against retailers,” he said in a phone interview.
In Ontario, the OCS gets the largest margins on sales, followed by private retailers, and producers the slimmest of the three.
Like many in Canada’s biggest provincial market, Rhodes wants the pot distributor to reveal how much it marks up prices for private retailers.
And because of the lack of transparency on wholesale prices, licensed producers don’t have access to data on which stores are selling their products and for how much.
“It’s not a normal industry,” he says. “Every other industry you would have access to wholesale and retail sales data.”
The OCS has stated that each province negotiates prices with LPs, and those agreements are not shared publicly like many other industries. And in its latest report, it said one of the keys to future progress will be to work with producers to ensure the most popular products are always in inventory.
But the Crown corporation also warned that the legal industry’s market share will decline in the next quarter due to Covid-19 lockdowns in the Toronto and Peel regions.
Rhodes says sales are down 25–30 per cent since his store was forced five weeks ago to operate solely through pickup and temporary delivery.
“It’s definitely not ideal. And having to layoff people during Christmas time is heartbreaking,” Rhodes said.
Allow all retailers to deliver, pandemic or not
During the second quarter, legal cannabis sales in Ontario hit $204.3 million. The OCS said its sales reached $30.5 million while retail stores sold $173.9 million.
With 183 stores open at the end of September, Rhodes says private retailers should have a much higher share of the legal market than 5.7 times the sales of the OCS.
Since coronavirus cases have been on the rise since the fall, Rhodes suspects more people have been ordering online from the OCS.
He wants delivery to be allowed for all Ontario retailers permanently to level the playing field with the government-run operator. And Rhodes desires that policy change despite the fact it favours major retail chains that could deliver across the entire province.
For now, The Neighbourhood Joint has only been offering delivery in a small area of Toronto. It’s seen a major drop in accessory product sales, as customers can’t browse the store and chat with budtenders.
“These are complex products and we’re in a market where we have a lot newbies to cannabis and they want the education on products. But that whole side of it is just gone right now.”
The pandemic has created delays in some cannabis shipments as well as the rollout of new stores. Both have benefited the underground market.
Ontario gets more stores, products and lower prices — but illicit quality still better
The OCS says its “single priority” next year is to support the expansion of retail network across the province with the Alcohol and Gaming Commission of Ontario. Last week, the AGCO said it will increase store authorizations to 80 a month to help process 1,100 active retail applications. There were 269 open in Ontario as of Dec. 8.
The OCS said it will also focus on continuing to lower its prices on a wider variety of products.
The legal industry’s 10-per-cent market share gain is its largest ever mainly because the OCS reduced the price on 322 products, the distributor said.
The average price of dried flower on OCS.ca dropped to $6.41 per gram, dropping from $7.05 a gram in the previous quarter.
Meanwhile, illicit market cannabis climbed to $8.17 per gram, up from $7.98.
Rhodes notes the price gap is likely because the illicit market offers the most premium dried flower products whereas the legal market has seen the rise of the $99 ounce in the so-called value brand category.
“We’re selling ounces for next to nothing, but those ounces are brutal in quality,” he says.
The OCS touts the highest number of unique products available in the legal market, which increased to 1,120 in the quarter.
Altogether about 25.8 million grams of products were sold with dried flower accounting for 60 per cent of sales. Vape and pre-rolls came in second and third at 15 per cent and 12 per cent respectively.
The OCS also highlighted which cannabis brands led in various product categories between July 1 and September 30. Pure Sunfarms, which is owned by B.C.-based vegetable producers Village Farms International, Inc. (Nasdaq: VFF), led the dried flower segment on OCS.ca at 13 per cent and with retailers at 12 per cent. Aphria Inc. (TSX: APHA) and its Good Supply brand took top spots in vapes and pre-rolls at stores at 20 per cent and 14 per cent respectively. Meanwhile, beverages made up only 1.6 per cent of Ontario sales, and Canopy Growth Corp.‘s (TSX: WEED) brands grabbed the top three spots at stores.
While the OCS will continue its crusade against the illicit market in 2021, Rhodes says he’s not against the underground because they’re the one’s who fought for legalization in the first place.
Instead, he would like Ontario and Ottawa to decrease barriers for illicit players and welcome them in the fold.
“We could benefit greatly from having some of these guys’ products in the market because the pot is good, opposed to some of the big boys now who are just putting out garbage. And they just have stock piles and stock piles of stuff that people don’t want.”
Top image via The Neighbourhood Joint