Opinion: Can small licensed producers compete in Ontario post-legalization?

Any new industry has its challenges, but the Ontario government has carefully studied the alternatives when it comes to its retail legislation. But what does that mean for Ontario’s cannabis entrepreneurs?

By Jean Lepine

October 5, 2018

A move that makes both political and business sense—the proposed cannabis retail legislation introduced by the Ontario government—could possibly propel cannabis entrepreneurs to new heights.

Moving away from the patchwork of early retail designs, the legislation—guided by the Ontario Premier Doug Ford, Attorney General Caroline Mulroney, and Finance Minister Vic Fedeli—creates an interesting coalition between the supporters of the Ford Administration (free-enterprisers) and the early-stage cannabis entrepreneurs. The province has also taken the weight off of the municipalities by having the Alcohol and Gaming Commission of Ontario manage the entire retail store application process.

The key municipal questions that remain to be answered are: do we want our constituents shopping outside our municipality and tax base, and is it advisable to miss out on these innovative companies and retail jobs?

Most municipalities will weigh the pros and cons: the benefits of new investment in their communities vs. the likelihood of opting out and leaving the field wide open for the local black-market player to succeed in. For those who decide to opt-in, the current legislation will provide opt-in municipalities with 50 percent of the surplus of Ontario’s portion of the federal excise duty on recreational cannabis should it exceed $100 million over the first two years of legalization.

In their legislative approach, the ministers have ensured that the bill is equally focused on a competitive free market design with a strong mandate for the protection of youth and the elimination of the black market.

But is this free market design bulletproof? Will the regulations follow through and cement that entrepreneurial approach or create unintentional loopholes for large licensed producers (LPs) in Ontario? That is the real question.

Soon after the tabling of the legislation, Canopy Growth’s CEO Bruce Linton, in an interview with BNN Bloomberg, spoke about Ontario’s recreational cannabis sales plan. I’m paraphrasing here, but he said that the cannabis companies will achieve through the back door what the province said no to through the front door. He also said that he will license his brand and products if needed, and will partner to ensure they drive their products through the new retail system.

A few days ago, at the International Council of Shopping Centers convention in Toronto—a conference bringing together players from the retail real estate industry—Canada’s large LPs in discussion with the landlords were overheard saying that they will find a way around the legislation.

Note to the wise, regulators will need to thoroughly assess the level of ownership of any LP in any retail play. If they don’t either outlaw it outright, as per the stated plan, or set very low ownership limits, we may see a re-enactment of the Beer Store model; and we shouldn’t count the Cannabis Canada Council out on this matter as they could look for ways to test the government’s resolve.

Beer Store 2.0

One need not go too far back into Ontario’s beer history to a day when the Beer Store was owned and managed by Canada’s big brewers. If the large LPs circumvent the province’s intent, they could most likely replicate that model.

You’ll recall that the logjam was broken when the provincially run liquor board decided to offer craft brewers some shelf space. It took government intervention to offer consumers an alternative to the prevailing beer monopoly and their brands. Innovation didn’t drive the market, but in this cannabis space, we know that innovation will take this industry to new heights.

Ontario independent cannabis entrepreneurs

The large LPs steer the current industry association, Cannabis Canada Council, and rightfully so, they pay the freight. Their mission was clear, get us vertical integration in Ontario or at least the right to retail along the lines of Alberta’s model (up to 15 percent of store licenses for any one LP/organization). Ontario’s retail design said yes to one farmgate store per LP but no to full vertical integration, at least in this initial phase. To some, it may have been an unexpected choice but fully aligned with a view that Ontario wants to see a competitive marketplace with diverse entrants. By doing so, it ensured that smaller LPs’ products will have a fighting chance to get onto retail shelves.

With a focus on encouraging innovation, economic development and regional job growth, a new industry coalition has been formed called Ontario’s Independent Cannabis Entrepreneurs to ensure that cannabis entrepreneurs from different sectors including smaller LPs will have a voice as the regulations take shape.

Any new industry has its challenges, but the Ontario government has thoroughly studied the alternatives and given itself future optionality. The rest will be known as time goes on.

Celine Chang