5 years of learning: An anniversary tribute to cannabis
With enough data to sink a ship, industry has all the tools it needs to turn lessons learned into new leaves – a retrospective look at the five-year anniversary of weed in Canada
July 24, 2023 By Haley Nagasaki
October 2023 marks the five-year anniversary of legal cannabis in Canada, and last Fall, Grow Opportunity also saw five years covering this industry. In honour of the occasion, for us and for our nation, we present a retrospective spin on the past handful of years with experts’ views on how to incorporate all all we’ve learned since 2018.
The sections assessed herein include regulatory comments by consultant Mitchell Osak, cultivation and production insight by grower and consultant David Kjolberg and covering retail, Jaclynn Pehota, executive director of the Retail Cannabis Council of British Columbia (RCCBC), points out a bright spot in this industry: the triumphant small business owners in B.C.
Mitchell Osak on regulatory challenges
The regulatory hurdles in the Canadian cannabis market imposed by Health Canada and the federal and provincial governments combined create a minefield for licensed cannabis producers who, “today, can be paying as much as 33 per cent of their sales revenue in taxes and fees,” writes Osak, in an email to Grow Opportunity. While cannabis in Canada is federally legal, “there are a myriad of market structures, wholesaler mark-ups and policies that vary from province to province. This necessitates different strategies, thereby complicating life and raising the cost for LPs,” he says.
“The issue of regulatory inconsistencies between jurisdictions is a major challenge affecting this industry and its ability to turn a profit,” continues Osak. And regulations related to the onerous level of excise taxes will only shift if the CRA plus all provinces/territories agree to relinquish a portion of their revenue and alleviate the financial conditions impairing LP operations.
Furthermore, restrictions on THC in edibles have neglected consumer needs for higher potency products and stunted potential demand, “sending users back to the untested unregulated market” – the public health implications of which are evident yet ill-addressed.
For the past five years, industry players have acquired essential knowledge and lessons learned enabling them to produce better products at lower costs. Osak now advises clients to “choose a strategic lane and execute with excellence.” Maintaining a profitable business, he says, depends on “aligning your operating model and capacity to your actual market demand and channel needs, because eschewing humility and the ‘build it and they will come’ model is a recipe for failure.”
Osak affirms that successful LPs understand the above winning formula is part “art and science.” The art includes “innovation, maximizing human capital and learning from your peers,” while the science could involve using “data analytics to make better operational and marketing decisions, prudently managing cash and staying close to your consumers’ changing needs.”
Though rest assured, “there is still plenty of growth left in the Canadian market,” says Osak. As much as 50 per cent or more than today. “This growth will be driven by higher consumption by existing and new users coming in from the illicit market, enticed by a greater selection of higher quality and cost competitive products that deliver 100 per cent on user needs. LP revenue growth will also be propelled by greater sales in international medical and emerging adult-use markets.”
As an unfortunate yet consistent business truth concerning nascent industry contraction, fortunately those “budding entrepreneurs now entering the market can learn from their first-moving peers.” They may employ asset-lite strategies, such as “outsourcing production while focusing on genetics curation or brand building,” writes Osak. “And after the industry goes through its inevitable shakeout of LPs and retailers, new market opportunities are likely to appear,” he concludes.
David Kjolberg on cannabis production
While working as the master grower for Peace Naturals from 2014-2017, on the eve of legalization, Kjolberg recalls the swaths of tour groups requesting to come through the facility. A group of four would arrive, “and you’d have your grower, your lawyer, your accountant, and another c-suite exec, and they would be most interested in asking about scaling,” says Kjolberg, in a phone conversation with Grow Opportunity.
“You’d see the accountant’s eyes widen after he’d do the math because on paper, it looks like they’re going to be rich,” he continues. “And that was the problem! It all started because everybody was focused on growing spreadsheets instead of quality flower.”
Kjolberg points to the challenges producers ran into through a lack of consideration for factors such as powdery mildew, Hop Latent Viroid or the unfamiliarity of genetics with different requirements. This proved problematic for some in upper management who didn’t understand the plant or the culture that came with it.
Some of the bigger LPs, he says, likely had a grower with some good credentials who wrote the SOPs. “And after they’re gone, they’d keep using the SOPs and then end up with product they can’t sell because it’s a bunch of dry popcorn nuggets that’s not been cured properly,” says Kjolberg. “Cannabis, anywhere between 10.5 or 12 per cent moisture – you know you’ve got a nice enjoyable smoke,” he adds. “But when it gets down to five or six per cent, you’ve got problems. And consequently, the drier it is, the better the test result.”
The advancements in cannabis production over the years has been paramount. “What’s changed over the last five years is technology,” says Kjolberg. “Crop steering, using sensors in your grow, is very important. HVAC systems have gotten very good, lighting is getting very good,” he says. “So, by the use of automation, we’re able to know where we stand in our grow rooms.”
“But the biggest factor of what’s changed,” says Kjolberg, “came with the nursery licenses – it’s the availability of genetics and tissue culture.” In a 2,300-square-foot facility, real estate is reserved for flowering rather than mothering and cloning. Producers can purchase excellent genetics from nurseries as clones or as teens. “It’s plug and play, and it’s guaranteed,” he says.
“When I first started, you had what you brought with you. A bunch of seeds or plants you had when you first got your license,” he says. “And now with AI and automation, the best grow rooms are the ones you stay the hell out of.”
Some changes Kjolberg would like to see sweep this industry from a retail perspective include heightening the sensory aspect of cannabis sales, as in sight and smell, which informs consumers by drawing attention to the flavour and terpene profile of products. He’d also like to see increased budtender wages and better relationship-building between buyers and producers.
For those producers now entering the market, a hands-on approach to brand building based on great genetics, while refraining from being top-heavy in management, Kjolberg suggests, is the right way to go. The next wave of entrepreneurs “should be lean and produce great flower that pays the bills,” says Kjolberg. “When you know your next harvest is only two weeks away, that’s the optimal place to be.”
Jaclynn Pehota sees retail success in small business ownership
The unregulated market’s chokehold on this industry, especially in categories like concentrates, continues nearly five years into the legalization of cannabis.. Store clusters in some areas and lack of access in others compound this issue in that some retailers forecast a similar contraction as the one being experienced by LPs.
“There are situations with too many stores in an area for the population density and these challenges are redoubled by the most impactful issue: competition with the unregulated market,” writes Pehota, in an email to Grow Opportunity.
“The last Stats Canada poll I saw had 50 per cent of Canadians that use cannabis self-reporting that they exclusively used the legal system. 50 per cent market capture amplifies the struggles of licensed retailers for obvious reasons. The legal market simply isn’t playing the game with a full deck of cards,” she says. “We can’t win with half the deck missing.”
In addition to the lack of retail license capping in provinces like Ontario, other factors impede retailer success, such as “lack of understanding on the part of elected officials and overly onerous marketing restrictions.”
But what is it that sets the East apart from the West? As executive director of the RCCBC advocacy group, Pehota sees circumstances in Ontario largely as “an aftershock of two factors: a speculative bubble driven by pubcos and significant regulator flip-flops that took the total number of stores in the province from 22-ish to over 200 in less than a year, and has expanded to over 1,800 since.” She points to the inability to differentiate in market because “all product is coming through the same public wholesaler, resulting in a race to the bottom on pricing.”
In B.C., a slower approach to store growth meant that businesses had a better chance to establish themselves, and the direct delivery opportunities between retailers and small producers created specially curated opportunities with “exclusive lines of supply.” Therefore, the difference in the outcome between provinces, as she sees it, is “down to the original regulator mindset, industry organization and the direction of industry advocacy.”
Successes as a result of B.C.’s more prudent cannabis retail development, the capping placed on store volume expansion and the profitable independent retailers, demonstrates what’s possible as we enter this next wave of regulated cannabis.
“What has not been successful in B.C. has been the ongoing attempt by larger chains to buy market share in place of pursuing sustainable growth. You can’t ‘fake it ‘til you make it’ in this situation,” writes Pehota. “Recent bankruptcies demonstrate this very pointedly.”
Western Canada is also leading the conversation around preventing loss and incidents by removing opaque window coverings in cannabis retail stores. As of June 23, Ontario is reconsidering its stance on this as well.
Retailers that were perhaps lost in conversation – eclipsed by production – are now coming back around to the forefront, equipped with new datasets. Incorporating this knowledge could begin with a pivot away from the big pubco narrative in favour of privately owned successful small businesses, where in B.C., RCCBC represents 175 stores, or one-third of the total retail market.
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