CanadaDataWhy the Black Market Isn’t Going Away Anytime Soon

Price is going to be a key determinant for recreational cannabis users to select legal pot over the supply that they can get from the black market. It's no wonder the black market is winning that battle in Canada right now.
David Jagielski David JagielskiApril 8, 20196 min

Price is going to be a key determinant for recreational cannabis users to select legal pot over the supply that they can get from the black market. It’s no wonder the black market is winning that battle in Canada right now.

Statistics Canada reported that between October 17, when recreational marijuana was first legalized, and the end of the year, the average price for dried cannabis from legal suppliers was $9.70. That’s considerably higher than the $6.51 that consumers could get from the black market. That’s a near 50% premium to buy from legally run pot shops.

Whether it’s worth it is the big question. However, so far, the results have been very strong from the market as companies have been seeing sales soar. Although that’s easy to do when sales from the segment didn’t even exist a year ago.

Can legal pot shops offer enough value to convince consumers to ditch the black market?

In the black market, consumers don’t have to pay sales tax or get excise taxes passed onto them the way they do in legal pot shops, which are no doubt big factors in the legal price of weed becoming astronomical in the eyes of many black-market users. And while the Ontario Cannabis Store (OCS) believes it is being competitive relative to illegal pot shops and suppliers, it might not be enough to keep customers coming back.

The sales job is in convincing customers that the quality is better, but that might be an uphill battle. Although quality is very important for the medical market where patients need to ensure they’re getting the correct dosage, there’s certainly less of a need for that among recreational consumers, where the risk is much more contained. Ultimately, it comes down to the individual consumer and how much importance they place on the cleanliness and quality of the cannabis that they buy.

Researchers found recently that in Madrid, as many as 88% of the cannabis samples that they had tested contained fecal matter and all of them contained E. coli, likely as a result of smuggling the drugs. If that were discovered in North America, that would no doubt send many customers running from the underground markets and price would become of secondary importance very quickly. But in an era of fake news and a lot of distrust of the media, the easiest way to convince customers would have to be to simply be more competitive on price.

Private Retailers Could Be the Key

The big opportunity for the industry is for private retailers to be more aggressive on price and find ways to generate more efficiency. Government-run stores are not likely to be the most efficient or cost-effective, and so as we see more private shops being rolled out, there will be more potential for prices to come down.

However, it’ll ultimately come down to production costs of the big producers like Canopy Growth Corp (TSX:WEED)(NYSE:CGC) and Aurora Cannabis Inc (TSX:WEED)(NYSE:ACB). The more efficient their operations will be, the greater chance there is that they can sell it at lower prices. The problem in the meantime is that with supply being very restricted in the early stages of the industry’s growth, there’s little incentive at this point for the big companies to try and offer lower prices since it’ll hurt their sales numbers without necessarily selling more product.

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