Recreational cannabis will be legal on October 17th and among the details that remain fuzzy is how it'll impact the economy.
Nationally, it’s estimated that recreational cannabis will bring in $400 million a year through the cannabis excise tax; provinces will get 75% of this sum.
Although these funds will stimulate the economy, the real impact will come from businesses preparing to meet consumer needs; growing the legal industry far beyond medical cannabis, creating new opportunities in every area from production to retail and the spillover effect that comes as a result.
“You’re moving revenue from marijuana sales into the legal sphere,” says RBC senior economist Nathan Janzen. “Now it's easier for that income to go back into the economy.”
“Stats Canada has some really rough estimates that can be in the order of $3 to $4 billion net added to the economy’s GDP, but that's activity that has already been happening (illegally) and they're just now counting it,” he explains.
Currently, the federal government manages registered cannabis producers who are licensed by Health Canada. Once cannabis is legalized, the federal government will continue to oversee producers, while the remainder of the industry falls to the discretion of the provinces and municipalities.
In Alberta, the NDP opted for a system similar to the one currently in place for alcohol, including distribution, regulations and retail licensing through the Alberta Gaming and Liquor Commission (AGLC).
Privately operated retail locations, supplied with product by the AGLC, will offer over-the-counter cannabis while the government oversees online sales.
“I think it’s positive that the province aligned for private dispensaries, there's lower risk to taxpayers involved,” says Jonathan Denis with the Canadian Cannabis Chamber. “As you know Ontario has taken a different approach whereby the dispensaries are going to be run by the government, like the LCBO. My concern with that is that it does put taxpayer’ dollars at risk in a business venture.”
To those who currently work within Canada’s cannabis industry, the province’s decision to go with private retail lays the groundwork for a successful Alberta market by creating more opportunities for consumers and businesses.
“I think Alberta is likely to have the most effective and efficient cannabis retail system in Canada with the greatest participation by small businesses and entrepreneurs,” shares Cam Battley, CCO of Alberta-based producer Aurora Cannabis. “That's very much in line with the dynamic entrepreneurial nature of the province and given all the investment by us and others I think that cannabis, both medical and consumer, can be a significant and valuable industry for Alberta from the perspective of investment, employment growth and economic development.”
One aspect of the province’s regulations that will help to produce greater participation by small businesses puts a 15 per cent limit on the number of retail licenses any single entity can own.
Although this can be seen as limiting business potential, bigger companies like Alcanna (formerly Liquor Stores NA), which launched a plan earlier this year to retail cannabis, supports the government’s cautious approach to cannabis regulations while the province gets a more accurate picture of what the market will look like.
“We're in this for the long term. We're not particularly interested in making a huge amount of money in a year or two; we're trying to build a long-term business,” shares James Burns, vice-chair and CEO of Alcanna. “Over time, if we do it right, the government does it right and other businesses do it right, we'll all do very well. But we definitely support the government being cautious and trying to make sure that every contingency is thought through ahead of time.”
For many, the United States has served as an example of what can happen within the cannabis industry, as the country has seen nine states legalize recreational use since 2004. But for those who have been monitoring the market, and travelling south of the border to view cannabis businesses, the differences in approach at a federal level has had a huge impact on how far the economy can go.
“It's really completely different. It's a business with a lot of stigmas and because it's illegal there are operational and practical problems,” says Burns.
“Because it's still illegal federally, that has driven everything in terms of their businesses,” he continues. “[They] can't traditionally lease normal real estate because large landlords have federally regulated banks and institutions won't lease to an illegal activity. They also haven't been able to use banks, so it's a cash business as you can't use credit cards because it's federally licensed.”
Although the U.S. cannot serve as a complete representation as to the impact cannabis might have on the economy in Canada, it can help shine light on issues revolving around supply and demand that prove beneficial not only to cannabis businesses, but also to other industries as well.
“In any jurisdiction, so far at the state level where [cannabis] has been made legal, alcohol sales have dropped,” shares Burns, as to why Alcanna decided to get into cannabis. “There's really no magic number, but you hear anywhere between 5 and 15 per cent and even as high as 20 per cent in some cases.”
“So in terms of a business like ours where you have to open stores, pay rent and have employees, you really just can't afford to have your sales decline by 15 per cent,” he adds.
As for cannabis-related businesses, the U.S. market helps them to better understand the consumer and market trends that may influence the direction of a business.
“We do expect to see oversupply in Canada by 2020 and that means a couple of things,” says Battley of an issue seen in several U.S. markets. “You had better be able to produce cannabis on a massive scale very inexpensively, and that's one of the reasons why we chose a cultivation and production philosophy that’s specifically based on purposefully built, ultra-high technological facilities that will, even as there's market oversupply and wholesale prices come down, still be able to make excellent margins.”
The other step Battley says is important for producers to look at goes beyond the Canadian market as international demand continues to grow.
“On a global basis, the central fact of the cannabis market is the massive excess in demand for a supply of legally regulated cannabis, and very few companies that can supply those markets,” he says, sharing that Aurora Cannabis is already in the process of building a 1 million square foot facility in Denmark and has multiple partnerships with companies in Germany and Italy.
“We now have choices as to where we want to allocate our product for the Canadian medical market, the Canadian consumer market, and the rapidly expanding international medical markets,” explains Battley. “Let's emphasize within a couple of years the international medical markets will dwarf the consumer market.”
Diversification in consumer markets isn’t the only way cannabis companies are taking advantage of a growing industry and demonstrates just how far this newly legalized industry can go.
“We made it very clear that our business strategy is to become a fully integrated global cannabis powerhouse and to that end, we want to be involved in every segment of the market,” shares Battley of Aurora’s growth and partnerships. “For example right now, we have a division that does the design, engineering and construction oversight of the most advanced cannabis facilities in the world, called Aurora Larssen Projects Inc.”
“We're involved with strategic partners Radiant Technologies in Edmonton, working in advanced extraction technology. We're involved with Hempco where we also have a strategic investment, and we want to participate in the retail side of the business and to that end, Alcanna is the leading private liquor distributor in Canada, so it makes all the sense in the world for us to work in partnership with them.”
Although still early in the days of a legal cannabis industry, current investments, partnerships, employment growth and economic development has Albertans taking a serious look at diversification and market growth.
For a province that’s seen tough times in its dominant oil and gas industry is cannabis what’s been missing for a province stuck in the bitumen bubble?