At the minute it became legal, “Cannabis was “flying off the shelves” in retail outlets and online stores across the country as soon as the clock struck midnight Wednesday (October 17).
The demand was so high that pot stores reported running low or completely out of cannabis on the first day,” according to the Canadian news site GlobalNews.ca.
Sales were strong but costs varied widely.
And, price is important because “Four out of 10 Canadians say the price will determine whether they buy their pot legally or on the black market as legalization approaches.
That’s according to a Global News’ exclusive Ipsos poll on cannabis usage in Canada.
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What that means is if the government prices marijuana too high, Canadians are likely to continue the status quo and continue using the black market to obtain cannabis, Jennifer McLeod Macey, vice-president at Ipsos Public Affairs, explained.”
A Potentially Under Considered Risk Factor
With attention on the legalization of marijuana, there has been somewhat less attention to some of the risk factors associated with the sector. It is likely that demand will be significant, but the demand may have already been high in the illegal and unregulated market.
Unregulated markets have met the demand for marijuana for years. And, it could continue to meet at least of the demand if the legal market presents obstacles to buyers. Experts noted,
“Once there’s enough supply, then we can expect to see a downgrade of the black market. But Greg Engel, the CEO of Organigram, one of Canada’s biggest medical marijuana producers, says the black market is never going to go away completely.”
“It’s taken now four plus years since that program launched. Some of the estimates I’ve heard or seen is that there are roughly somewhere between 10 and 15 per cent of the black market remaining,” Engel said.
Another important point: the legal market will only be able to successfully compete with the black market if the buying experience is positive, Engel added.
This includes access to retail locations..
Are they close and easy to get to? What about online shopping? If the transaction is seamless, then it will encourage more people to buy legally. As well, will there be a wide variety of product?
“The extent to which [the black market] gets reduced is going to depend on the consumer end of things,” Trina Fraser, an Ottawa-based lawyer at Brazeau Seller Law who specializes in cannabis business law, said.
“The more we can match what the black market is offering or even beat it, that is going to be how we take a significant chunk out of it.”
This isn’t just idle speculation. Headlines note, “Surge in Illegal California Pot Shops Undercuts Legal Market.”
Broad marijuana legalization arrived in California at the start of the year. From the beginning, there was concern the legal market would be undercut by the massive black market that has existed for decades.
And that’s what’s happening. Nowhere is it a bigger problem than in the state’s biggest legal local marijuana market: Los Angeles County.
The number of outlaw dispensaries in the county greatly outnumbers about 150 licensed storefront retailers.
Legal pot shops are losing customers who can get products more cheaply at illegal outlets that don’t charge or pay taxes, said Adam Spiker, executive director of the Southern California Coalition, a trade organization that represents cannabis growers, distributors and dispensary owners.
It’s an “unfair competitive situation for licensed businesses,” Spiker said.
“I think if you turn the tables and took cannabis out of the equation — if it was another industry that didn’t have the stigmas — the government would do everything they could to give those licensed business paying taxes a level playing field.”
Data supports the view that illegal shops are meeting the needs of customers.
One of the selling points for legalization was it would generate a tax windfall for state and local governments. However, during the first quarter, the state reported only $34 million from cultivation and excise taxes, putting it on pace to fall well below the $175 million forecast for the first six months.
This means it will be a challenging market, but the challenge could result in large profits for some investors.
An index tracking marijuana stocks has moved sharply higher over the past year and has been consolidating its gains in recent months.