Capital and controversy: an attorney’s reflections on five years of legalization
August 14, 2023 By Matt Maurer
To me, it feels like only yesterday that Canada legalized cannabis for adult use. But as anyone who has been working in the industry for an extended period of time would say: this industry moves very fast.
Who could forget (for better or worse) the image of a smiling Bruce Linton manning the counter of a Canopy-owned retail store in Newfoundland, ringing in the first non-medical, legal sale of cannabis in our country’s history?
Just before and after legalization, LPs were the darlings and focal point of the industry. A new licensee announcement by Health Canada on a Friday was major news (and cause for investors to throw money hand over fist at them).
How can we forget these LPs racing to get licensed, racing to build out grow space, racing to get listed on publicly traded exchanges and racing to set up shop in Lesotho, Malta and pretty much anywhere in between? They were not only going to take over Canada, they were going to take over the world! And why not? These Canadian companies had a global head start that no one else had (sorry Uruguay, we never saw you as a threat).
As the LP section of the industry began to settle in, governments at the provincial level began getting their house in order as it related to retail sales. The government of our most populated province, Ontario, originally indicated that the retail market would be entirely government owned and operated, only for the Conservative party to unseat the Liberals and do a total 180 by allowing for privately owned retail.
Who can forget the great Ontario cannabis retail lotteries, which seemingly gave something to complain about to every industry stakeholder except for the many average Joe and Janes who won the golden tickets and the right to apply for a license to operate a retail store? Who can forget the controversy over what sorts of arrangements were to be permitted between brands and lottery winners, and the Alcohol and Gaming Commission of Ontario finding its way along with everyone else as the process unfolded?
And who can forget how we suddenly went from a very limited number of stores to an explosion of stores – the nature of the regulatory regime effectively removing the ability of would-be store owners to fully appreciate where their soon-to-be competitors would be operating relative to them.
“Clustering,” as the politicians in Mississauga like to say, and Queen West becoming ground zero for cannabis retail in the City of Toronto where more than a few local residents were distressed that their beautiful neighbourhoods had suddenly “gone to pot.”
Then the reality of the market set in.
LPs who had been expanding capacity at a rapid pace and geographically as well began to discover that the global market was not ready for the robust supply that they had been preparing. The domestic market was solid, but perhaps did not contain the demand that some of these LPs had forecasted.
Large, expensive facilities that were given attractive names by their owners began to close. Operating at a continual loss, because money was being spent to expand, was no longer an acceptable way of doing business. Share prices began to crater. Investors demanded better, and founders and boards were pushed out and replaced by more experienced executives who were expected to right the ship. Some of them were able to do so. Some of them steered their companies right into insolvency protection or bankruptcy.
Suddenly, many of the smaller, initially less ambitious (either by design or necessity due to lack of resources) LPs were the ones who were doing well – making products that consumers desired while operating within their means, and at a profit.
The retail side of things fared no better (at least certainly not in Ontario). Having to pay rent far above market (thanks to opportunistic landlords capitalizing on the rush of store applications) started to catch up with many owners. Throw in a pandemic that absolutely destroyed foot traffic for many stores for years, while being surrounded by competitors on every corner; it’s no wonder many went out of business. At first it was mom and pops, but then some of the larger brands/chains began to follow.
Lawsuits and arbitrations within the industry increased exponentially. Companies that had entered into business arrangements together during the earlier kumbaya phase of the industry were suddenly at odds with each other.
So, where do we go from here?
Many would argue that there were, or are, too many LPs and retailers for the domestic market. As unprofitable operators close up shop, we move further towards a level where supply meets demand and the remaining operators can (hopefully) continue to operate for the long term.
There are still untapped areas of the industry that most of the provinces and territories have kept wholly or partially closed to date. Cannabis tourism has yet to take off in a way that may be possible due to (depending on the province) restrictive rules on consumption, sales or both.
When festivals, hotels and restaurants are permitted to sell cannabis products, and health and other stores can carry CBD-only products, we should see a further decrease in stigma, new consumers entering the market and a general uptick in sales across the board. On the regulatory side, more lenient rules on packaging and promotion are likely to appear on the horizon at some point. It’s now clear that the sky has not fallen because of legalization, and the tight regulatory leash that government gave industry participants can be loosened up a bit. Indeed, and for example, some provinces have already done away with the requirement that retail stores cover up their windows to the outside world.
We certainly will never again see the same rush, expansion and excitement that we saw during the first few years, and that’s okay. At this point, the industry does not need expansion and excitement, rather it needs to settle into a realistic model that becomes sustainable for years to come.
It certainly doesn’t mean that those “early days” weren’t fun while they lasted, and that we can’t all look back and reflect on the wild ride we’ve been on – that is the premise of maturity, after all.
Matt Maurer is a partner and co-chair of the Cannabis Law Group at Torkin Manes LLP in Toronto, Ont.
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