Cannabis Stores No Longer Essential In Ontario: What This Means For The Industry

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Doug Ford has officially taken cannabis stores in Ontario off the essential businesses list, while liquor stores in Ontario continue to remain open.  The question now becomes, how will this impact the legal cannabis industry operations in Ontario? 

One Plant Cannabis Store - Ottawa, Ontario

As soon as I heard the news that Cannabis stores were being taken off the essential businesses list yesterday (Friday April 3rd) and would have to remain closed starting Sunday April 5th, I  rushed to my local cannabis store, and entered the lineup outside to buy some cannabis products, behind about 30 other people. This has been my first visit to the store that only just recently opened up in my area. In my opinion this business in particular was following all the required safety precautions given the current circumstances surrounding the outbreak of COVID-19: limiting the number of people inside, wearing protective equipment, and removing the self serve touch screen computers to avoid unnecessary contact. Right across from this business is a Costco which saw a lineup about three times as large, with people in the hundreds lining up to be slowly allowed in to buy essentials. This begs the question, if people are going to be lining up behind each other to enter stores in a similar manner, then what's the point of closing a certain subset of them, arguably something essential like cannabis? The chances of spreading the disease are going to be relatively the same in both situations.

The Good

The Ontario Cannabis Store (OCS) which maintains a monopoly on online sales of Cannabis in Ontario will see  its sales continue to surge.   Only recently in March we saw reports of huge sales growth on the OCS - "The last three days have seen a marked increase in volume in sales on OCS.ca and a high demand for our same day/next day delivery option where it is available.” (1). People will become more accustomed to ordering from the OCS and picking up their orders at their nearest postal locations, and a lot of the sales usually experienced by brick and mortar stores will shift to the Ontario Cannabis for the time-being. The inability to go outside could mean that more people start growing cannabis at home, which would boost sales for seeds which by the way are not cheap at all with prices over C$50 for a pack of four seeds. 

The Bad

Similar to how the Ford government has handled the roll out of Ontario stores where they experienced difficulty in speeding up the process, I forecast that the OCS will experience troubles handling such a large volume of orders. The logistics and supply chain if handled as poorly as the store roll out in Ontario could be disastrous for sales and impact customer choices for the future. As per my experience yesterday, almost all of the products I was interested in were available at my local cannabis store, however those same products were all out of stock on the OCS. The OCS is not designed to handle a large volume of orders, and as of this morning (April 4th), almost every edible available for sale was sold out on the OCS. People usually ask the question that since everything is moving to e-commerce nowadays, why would anyone want to buy something like cannabis from a retail location. For starters, the entire e-commerce side of the industry is in the hands of the OCS in Ontario, and all of the high demand products seem to consistently be out of stock. If things keep running the way they have been, frustrated customers and frequent smokers will find a way to get products through the black market. This could spell bad news for the industry. After all, these are law abiding companies that pay a good share of revenue as taxes to the government, and have a higher overhead than the black market which delivers to your house where OCS is no longer doing so until the foreseeable future. It still only makes up a small percentage of  overall sales in Ontario.

Conclusion

Due to the recent developments and decisions made by the Ford government, licensed producers (LP's) will continue to see short term pressure on sales, and perhaps even their stock prices. However, the good news for now is that other provinces have continued to keep stores open, which moving forward will continue to be a huge source of tax revenue for provincial governments as well as the LP's themselves. It will be notable to see how the OCS handles this huge influx of sales from demand now shifting from retail locations.

References

  1. Amid coronavirus, Canadian cannabis stores see ‘unprecedented’ sales surge

About The Author

I am an electrical engineering graduate from Carleton University, and have always had a keen interest in investing. I have been following events as they unfold in the cannabis space in Canada since 2017 and have always had the opinion that decriminalization is the way to go as it reduces drug related crime and can be monetized as a source of tax revenue for the government. My goal is to help people who invest in a risky space like cannabis understand what to look for, as the amount of information available is often overwhelming for new investors. Aside from that, there are several companies all competing with each other to get your investment dollars!

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