Recreational legal cannabis sales may reach 50% of total sales between 2025 and 2026
By Sylvain Charlebois and Brian Sterling
Recreational cannabis has been legal for a year in Canada, and estimates suggest retail sales during 2019, its first year, could reach between $1.2 billion and $1.5 billion. Today, edibles are now legal, meaning that companies can advise Health Canada of the products they intend to bring to market. Sales of new “Cannabis 2.0” products (edibles, concentrates and topicals) will likely begin in mid-to-late December.
There are numerous challenges that face companies and new cannabis products, not the least of which is consumer education and a strict regulatory regime that limits cannabinoid content, promotion, and manufacturing.
Retail sales of recreational cannabis have not met initial expectations. In hindsight, most consultant reports and projections prior to legalization were hugely optimistic. Many provinces encountered distribution issues and access was challenging for many consumers. The poorly executed retail outlet strategy in many provinces led to a lack of accessibility, which combined with higher selling prices (compared to illicit products) to significantly weaken demand for legal cannabis. In its 2018 report, Deloitte stated that nearly two-thirds of Canadian buyers would shift buying to legal sources. In fact, the evidence to date shows that the very opposite has happened: buyers currently prefer black market cannabis according to Statistics Canada, primarily because of availability and price.
In a recent report, BDS Analytics Data (with Arcview) projects 2022 legal sales in Canada will be $5.1 billion. This is a small fraction of sales Deloitte predicted in its 2018 report. The Agri-Food Analytics Lab predicts that legal sales will not reach $5 billion until 2025. Even edibles, which are soon to be legal in Canada, may not contribute much to sales given how restrictive Health Canada’s regulatory framework is. And even in more mature U.S. markets like California, Washington and Colorado, the share of edibles is between only eight and 13 per cent of total legal revenue.
Oversight will also remain a challenge for governments and may even allow the illicit market to expand as we have seen with dried products and oils this year. In addition, Canadians can legally grow plants at home in most provinces and can make their own edibles. This may further blunt initial demand.
Retail prices are clearly an important component of competitiveness with cannabis. According to Statistics Canada, legal prices remain over 80 per cent higher than those found on the black market. according to crowd-sourced reports, the quality of illicit cannabis is considered better, making the product more attractive to experienced users. Clearly, illicit suppliers have adapted well to new rules and a newly regulated market. We are expecting this to continue for the forecast period. If conditions change, such as increased enforcement against illegal sources, or a recession, then the forecast will need to change.
Cannabis Pricing in Canada 2018-19
Given current conditions, below are our estimates for legal versus illicit recreational cannabis retail sales until 2025. Legal sales may reach 50 per cent of total sales between 2025 and 2026, but guessing how persistent the black market will be is a mug’s game. Netting things out, we believe this forecast to be optimistic. Nevertheless, compared to U.S. states, the conversion pattern from illegal to legal sources in Canada is similar.
Nevertheless, we believe legalizing cannabis has created a new vibrant sector for our economy. Cannabis now contributes $8.26 billion to Canada’s economy and the sector employs 9,200 people, according to Statistics Canada. Legalization also permits science to do its work: to explore and verify the plant’s composition, genetics and chemistry (cannabinoids, terpenes, flavonoids) and effects (psychoactive and medicinal) even further.
Nearly all Canadian cannabis companies have had disappointing results and routinely posted losses and performance below their projections during the first year of legalization. Expectations only two years ago were much different. While many expected the first year of legalization to be marked by high profile incidences of over-consumption and reckless behaviour by some cannabis users, controversy instead impacted the corporate sector.
The CannTrust Holdings Inc. fiasco beginning in spring 2019 seriously undermined the credibility of the sector. The cannabis and food industries are very much aware of regulatory risk, and the CannTrust developments brought into sharp relief a lack of reporting consistency, performance controls, and industry governance. The company was found to be non-compliant with the most basic of licensure requirements by Health Canada: growing product in facilities that were actually not licensed. According to reports, CannTrust produced cannabis in unlicensed rooms to avoid detection by Health Canada inspectors, with further allegations that seeds sourced from the black market entered the company’s production facility. This well-publicized incident affected the entire industry’s credibility and called into question its capabilities and capacity to comply to regulations.
We are taking a more subdued perspective: it will take at least 10 years for the social stigma to diminish significantly. Approximately one-quarter to one-third of Canadians are considered conservative adopters, meaning they are not currently consumers, but are open to changing their minds. Cannabis will become socially normalized, eventually, just as alcohol did. We believe strict regulations are delaying that process more than expected and providing “cover” for the black market. But as cannabis becomes more accepted, the number of retail outlets will increase, and Canadians will come to see cannabis as just another option for them as consumers and patients.
Oddly, what could help the sales of edibles is the current vape products situation in the U.S. Vape products are suspected behind more than 1,300 people suffering lung diseases that are believed to be linked to vaping various products. As of this writing, there have also been 28 deaths from this problem in the United States. This may deflect consumers from inhaling drugs and translate into benefits for makers of edibles.
The cannabis industry can also benefit from standardization. At the moment, there are no verified standards for testing of cannabinoid content. Many labs follow known procedures; however, there is little consistency in these procedures, and some are even proprietary. This makes comparing cannabinoid content between licensed producers almost impossible. In the same vein, there are no national standards for identifying products or conducting electronic data exchange. This is driving up industry costs and makes tracking inventories and conducting recalls prone to errors and delays.
With edibles, what is called “onset time” is a critical factor in the next stage of cannabis-infused beverages and food. There are new commercial technologies available that allow food and beverage processors to reduce onset time for edibles and cannabis-infused beverages. For example, someone drinking a non-alcoholic, cannabis-infused beverage could feel the effects in 10 minutes instead of an hour, and those effects could wear off in about 90 minutes. This would make edibles more predictable in their effects and the market more attractive to consumers and the food/beverage industry.
Bad news is piling up for the cannabis industry, but recreational or adult use is here to stay. The industry itself, and the cannabis market generally, remains immature in Canada. We expect in the next 12 months for the industry to consolidate in a manner like any new industry and become more stable.
Regulations, however, will remain a challenge. It’s difficult to predict what may happen to regulations in the world of Cannabis 2.0. For instance, the province of Quebec is considering increasing the legal age to consume cannabis to 21, which in turn may make it more challenging for industry and keep doors open longer for the black market to penetrate. Accessibility and price remain the key drivers for consumers.
The federal government achieved its goal in legalizing cannabis and edibles but has failed to eliminate the black market, something it promised to do. The spirit behind current regulations for cannabis suggests Ottawa only wanted to decriminalize recreational cannabis, as the Netherlands, Argentina, Belgium or Peru did. Given the restrictive regulatory framework, we may see the illicit edible market in Canada expand, but such a claim remains speculative.
Of the Canadians who are favourable to legalizing edibles, we estimate that 73 per cent of them are willing to try an edible product. If Cannabis 2.0 is to succeed, regulations for food processors will need to loosen, giving the food/beverage industry an opportunity to develop loyalty to their products and compete with the black market.
Lastly, Canadian cannabis companies are expressing a desire to seek opportunities outside Canada. Mexico and New Zealand may soon legalize recreational cannabis in coming months. If the expected global market demand for cannabis comes looking for Canadian products, then the ground rules for producing, promoting, and distributing cannabis will need to change to meet swelling international consumer and patient demand.