In Canada, illegal cannabis is still ahead of legal

Legal cannabis spending in Canada has not dwarfed the country's still thriving illegal market, which probably accounts for about two-thirds of the country's total spending. That's what Nick Pateras, an industry veteran, says, who questions the latest official figures suggesting that regulated weed sales surpassed the illegal market for the first time in Q2 2020. In late August, Statistics Canada announced that household spending on recreational weed hit $ 648 million and spending on medicinal cannabis hit $ 155 million for the quarter. Meanwhile, illegal spending fell to a new low of $ 784 million. Hence, the federal agency says the total legal market now accounts for 50.5 percent of all weed purchases in Canada. The reported milestone made headlines and praise from industry watchers. Not only do these numbers conflict with the projections of prominent analysts who rely on a variety of sources to model them, but StatsCan's numbers are limited to self-reported surveys based on individuals who honestly report illegal activity. In addition, the national survey has been postponed in recent months, so the most recent figures are historical estimates. Pateras has reason to be skeptical. "If legal sales had already overshadowed illegal sales, Canada would be the fastest moving from illegal sales to licensed sales in any jurisdiction in the world," he said in a telephone interview. "In another country like Uruguay, this has never happened so quickly. That's why I think it's an eyebrow headline." Comparing the progress made between legal systems is only the first point on which Pateras is skeptical. He also doubts StatsCan's method of collecting cannabis data through voluntary surveys is a reliable model. "Most of the illegal market is measured through surveys by the agency," he says. "So basically you are asking Canadians to admit illegal behavior if invited through unlicensed channels - so that's obviously an understatement. Pateras worked for media company Lift & Co. (CSE: LIFT) for three years and now he is the European General Manager for Materia Ventures, a global cannabis company headquartered in Toronto. Pateras cites reports from major banks - including Cowen, Raymond James, and Bank of America - as more reliable sources for assessing the Canadian market. That's because the institutions extrapolate data from a variety of sources, both internally and from governments, research firms, and industry reports. According to the three major banks, the potential value for Canada's total addressable weed market is between $ 6.5 billion and $ 10.8 billion. StatsCan's data put the total market size at a meager $ 2.4 billion. "If you look at how they estimate the overall size of the market, it's billions of dollars larger than the annual run rate based on the latest data from StatsCan," he said. "So it's something that's not quite right. Either the market will grow a sizeable fraction beyond its current size, or \[StatsCan's\] numbers are underestimated. I suspect the latter." Pateras admits that there isn't a single source of truth for finding out how much Canadians actually spend on cannabis, but his own educated estimate is around $ 8 billion annually. That would mean the legal industry is now responsible for just over a third of all spending, based on data from StatsCan. And there is still room to grow. Reports show that Canadian consumption is increasing during the pandemic, including from more first-time users. A recent Deloitte survey found that 29 percent of Canadian cannabis users are using more than before, while 16 percent say they are using weed for the first time to cope with Covid-19 stressors. StatsCan confirmed with Mugglehead that it is using its National Cannabis Survey (NCS) as an indicator of total Canadian household spending. The agency says it also uses its own monthly retail sales data to calculate legal recreational spending and Health Canada data to estimate medical expenses. "We derive illegal recreational cannabis as the remainder of total cannabis spending minus legal recreational and medicinal cannabis," a StatsCan spokesman said in an email. However, "the NCS is temporarily on hold, so we used the historical trend to estimate illegal cannabis spending for \[the second quarter\]". According to the StatsCan website, the NCS is typically conducted online or by phone to 12,000 households each tax quarter to collect a cross-sectional sample of the 10 provinces. The sampling error of the survey is the reported 2.5-6 percent. The response rate is quite low, however - around 47 percent in the fourth quarter of 2019. For Pateras, these factors are the reason the estimates are questionable at best. "We derive illegal recreational cannabis as the rest of total cannabis spending minus legal recreational and medicinal cannabis," a StatsCan spokesman said in an email. However, "the NCS is temporarily on hold, so we used the historical trend to estimate illegal cannabis spending for \[the second quarter\]". According to the StatsCan website, the NCS is typically conducted online or by phone to 12,000 households each tax quarter to collect a cross-sectional sample of the 10 provinces. The sampling error of the survey is the reported 2.5-6 percent. The response rate is quite low, however - around 47 percent in the fourth quarter of 2019. For Pateras, these factors are the reason the estimates are questionable at best. In a heavily publicized report last year, business accelerator Grow Tech Labs estimated the unregulated economy at more than $ 10 billion based on the number of personal and designated medical production licenses, a large percentage of which were historically used for the illicit sale of cannabis has been. "If we saw even 15 percent of those breeders entering the legal market as micro-breeders, we would be looking at an economic contribution of $ 6 billion," said senior project manager Natasha Kumari in an email. Since legalization in October 2018, the number of these licenses has grown to 35,227 by March 2020, an increase of nearly 10,000 - according to Health Canada. Given how many of these licenses have been used in the past, there is more reason to doubt that regulated channels champion Canadian cannabis. Since September 2019, the number of patients registered with licensed producers has fallen sharply, which many attribute to Canada's lack of medical cannabis program. This could also be the reason for the increasing number of registrations from non-LP producers. While the legal industry may not be advancing as fast as StatsCan suggests, Pateras says it has still come a long way in two years, considering its highly experimental adoption. Realistically, if you want to drive out the black market, you have to be able to offer exactly what the black market offers, he says. "I think we know more stores are needed, we know more products are needed in terms of different formats and more affordable prices, and we know potency levels will be important too," Pateras said. In Colorado, the oldest legal recreational cannabis market that has been in existence for seven years, Pateras says the legal industry now accounts for about 75 percent of all weed sales. He said a big part of success in Colorado is getting one business for every 10,000 people. "We're nowhere near as far as we are in Canada - not even close. And we know that stores grow sales because consumers want convenience," he said. There are currently over 1,100 stores open in Canada, i.e. about one shop per 34,000 inhabitants. Ontario, the country's largest provincial market with nearly 15 million residents, recently announced it would double the number of store permits in order to expand faster than the 150 stores that open today. However, Alberta has now exceeded the ratio of 1 to 10,000 with 518 stores for its approximately 4.5 million inhabitants, which could indeed indicate oversaturation. Pateras speculates that the biggest driver behind converting customers from illegal markets into regulated channels is simply price. He commends LPs for introducing more brands of dried flowers this year than mass-produced items that sell for around $ 5 a gram. "These value-added products now have a 40 percent market share in Ontario, for example, which shows the importance of price as a buying lever for customers," he said. "I think you will see this trend continue. As Health Canada becomes more comfortable regulating the industry, it expects regulatory requirements to be relaxed and licensing, construction and operating costs to come down. To get a grip on quality, the big producers are now focusing on improving cultivation methods to improve cannabinoid levels and terpene profiles. At the same time, more small to medium-sized growers have gone online this year and consumers are responding positively. "Artisanal low-volume growers who make high quality, differentiated products really stand out," he said. "We see that these products are moving very well - there is an extremely high demand for them". For pateras, the Canadian federal government should also relax rules on things like THC caps for 2.0 products. He says the big manufacturers need to pull together and offer a wider range of specialty products. "Today there are only five brands of edibles left in Ontario made by four manufacturers. On the black market, however, there are dozens and dozen of options with much higher potencies," he said. But even in Colorado, where the rules are less stringent and more productive, moving the last 25 percent of consumers to the legal market has proven a difficult task. Pateras sees a long road ahead for Canadian industry to achieve success in Colorado.