Assessing Blueprints for Combating the Black Market
A significant public policy rationale for legalizing cannabis retail has been the elimination of the cannabis black market. The desirability of eliminating the black market has, in turn, been driven by the public health objectives of preventing sales to minors and ensuring product safety. In Canada, cannabis retail has been placed within the confines of provincial licensing and distribution models, and certain models have fared better than others. This article makes a brief case for why more restrictive models are a less worthy adversary for the black market, and are therefore more likely to frustrate the public health objectives that underlie legalization.
Simply put, restrictive licensing and distribution models are less capable of meeting consumer demands and preferences, leaving the black market to fill that void. More restrictive licensing models provide fewer retail store licenses (resulting in fewer retail stores), and have stringent rules around how many stores one business can own or control. More restrictive distribution models also prohibit direct sales to consumers and retail stores by licensed producers, with provinces acting as intermediaries instead, thereby causing delays and increasing costs. The most maligned restrictive licensing and distribution model is Ontario’s regulatory scheme.
The focus on Ontario is, to an extent, due to the province being the largest consumer market in Canada, and therefore the central point of interest for cannabis businesses and commentators. A major issue plaguing the cannabis industry in Ontario is that the number of retail stores is disproportionate to the population (and, ultimately, demand), particularly in larger urban centres, such as the Greater Toronto Area. Currently, Ontario has issued 24 retail licenses to date through the first provincial lottery process, with an additional 42 retail licenses being withheld due to legal actions brought by certain applicants in the second and most recent lottery processes. In comparison, Alberta, which has a smaller population, has issued nearly 300 retail licenses, and British Columbia, also less populous than Ontario, has issued approximately 75 retail licenses. Provinces have felt the need to ensure that the number of retail stores does not outstrip supply, but those concerns are now being alleviated as licensed producers continue to establish themselves and expand operations. Notably, Quebec, which boasts a substantial consumer market, has opted for a government-controlled retailer (the SQDC).
Saskatchewan is the only province that allows for direct distribution from licensed producers to consumers and retail stores. Provinces generally have issues matching inventory to consumer demand, and the role of the middleman increases transaction costs, and those costs are being passed on to consumers. For instance, the Ontario Cannabis Store’s inventory does not adequately reflect consumer preference for high THC products, but is quite extensive, resulting in an expensive stockpile composed mostly of less sought-after cannabis. The Ontario Cannabis Store charges consumers 74% more than what it pays licensed producers.
Per a Canadian Bar Association article published several months ago, the black market holds an estimated 80% of cannabis sales since legalization. My submission is that, if the provinces are to prioritize the public health objectives associated with eliminating the black market, the provinces should generally accelerate retail license issuance and consider permitting direct sales. The Province of Ontario has asked the Ontario Cannabis Store to re-evaluate the regulatory scheme and the Ontario Chamber of Commerce has also made recommendations similar to those contained in this article.