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O Cannabis: Canadian Pot Industry Looks to Year Two of Legalization

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A sense of pride underpinned the anniversary of Canada's first year of adult-use cannabis legalization. Despite an array of challenges, advocates, enthusiasts, and cannabis industry stakeholders felt Canada's great cannabis experiment had mostly worked. But as the industry looks anxiously to the next phase of legalization — when they'll be able to sell higher-margin products like vapes, edibles, and topicals — they're all too aware that many of the same setbacks that challenged the young system last year still remain.
"By any reasonable standard, we have to say that the beginning of consumer legalization in Canada has been a success — not perfect, but broadly a success. In spite of bumps in the road we did something remarkable," Aurora Cannabis Chief Corporate Officer Cam Battley told Cheddar. "This has been a much smoother launch of adults consumer use than a lot of people anticipated."
As a cannabis producer out of Alberta, Aurora unveiled information about many of its new product offerings last week in honor of the second wave of legalization, known as "Cannabis 2.0." The company teased several new product offerings, including vaporizers, infused mints, caramel-filled chocolates, and vegan brownie cookies in partnership with companies like JACEK Chocolate Couture and Touche Bakery.
"It's our intention to participate in every single segment of the cannabis sector. What we are doing right now is we are prioritizing those particular segments where we have a strong belief that there is already evidence they will be in demand by consumers," Battley said.
These products, of course, won't actually hit shelves until the middle of December at the very earliest, as producers must first give Health Canada 60 days notice of the products they have planned. And when edibles and topicals ultimately gain approval, they'll be subject to a laundry list of regulations, like strict THC limits, and complex packaging and labeling requirements.
Chocolatier Brad Churchill understands these complications firsthand. His chocolate company Choklat has spent six months and "several million dollars" navigating what Churchill called "a labyrinth of bureaucracy and redundancy." The process has involved building out his facilities to be Health Canada-compliant: installing security systems, submitting an evidence package to the agency, applying for licenses, and hiring experts to assist the company throughout the process.
"I'm a pretty good guy about getting through due diligence," Churchill said. "I've taken a dotcom company public on the Nasdaq stock exchange. I have an understanding of corporate governance and legal documentation. In all honesty, there is no way I could have gotten through this process without actually hiring a company to take us through that process."
Choklat enlisted the help of a cannabis consulting firm to help it navigate the licensing system and has received guidance from cannabis accessories retail company Namaste Technologies, which took a 49 percent stake in the chocolate company back in March. For a company or entrepreneur with fewer resources or less expertise, however, Churchill said startup costs would be prohibitive.
And his frustrations extend beyond navigating the challenging licensing system. He finds limitations on THC content restrictive and packaging and labeling requirements wasteful — not to mention expensive. Edibles can contain only 10 mg of THC per package "to reduce the risk of overconsumption and harm in the event of accidental consumption," according to Health Canada.
"The pricing of the cannabis, wasteful packaging, the overhead, the bureaucracy, the reporting requirements — they make it so expensive for companies to make a cannabis-infused product that they can't compete with the black market" Churchill said.
If any of this sounds familiar, it's because these challenges are not terribly different than the troubles that plagued cannabis companies during the rollout of legalization last year.
Weeks after recreational sales in Canada kicked off in October 2018, the system was already beset by product shortages,which were aggravated by a licensing backlog, an inconveniently timed postal strike, and a shortage of cannabis dispensaries.
To this day, some of these issues linger. Some provinces, for example, have been slow to adapt. Alberta, widely considered the most mature market in Canada, although ranking fourth in terms of population, has licensed some 306 retailers, according to the Alberta Gaming and Liquor Commission. By contrast, the most populous province, Ontario, has only licensed about 25 dispensaries; and in Quebec, residents must still purchase their cannabis from government stores, according to Health Canada.
Experts believe a shortage of retail locations has contributed to lagging cannabis sales in the country. Prior to the launch of legal adult-use sales, Deloitte had estimated recreational sales could pump some $4 billion into the economy, even with a lingering black market, valued around $1 billion. Today the figures are essentially reversed. Sales have come in just around $1 billion, according to Stats Canada, and the illicit market is estimated to be worth $5 billion to $7 billion, according to the Associated Press.
"The black market is well-developed, super-efficient, has low prices, and, in every state we've seen, and now in Canada, there's going to be a battle royale for the consumer dollar between the legal market and the illicit one," said Tom Adams, managing director and analyst at BDS Analytics.
BDS Analytics estimates Canada's medical and recreational cannabis market will hit $1.9 billion in 2019 and surpass $6 billion by 2024. Adams said it will likely take "decades" for the legal market to replace the illicit one "just as it did with alcohol."
In spite of its many challenges facing Canada's cannabis companies, many in the industry still believe the advent of cannabis 2.0 will be monumental for Canada.
"It will be absolutely transformative," Adams said, adding that a grower in Colorado made him see, "the world is not making any more smokers. The business would be highly limited if flower was all it was going to be, but it is going to be going in so many directions."
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