Ontario Drops Profit Margins To Compete With Illegal Market

0
1905
Cannabis jars Ontario
Photo: Shutterstock

Ontario is dropping its weed profit margins to get the ‘upper hand’ over the illegal market

The Ontario Cannabis Store says it will be reducing its price margins in a bid to help pot retailers compete with the illicit market.

The provincial pot distributor announced the margin change Thursday, saying it will be implemented in September.

The Ontario Cannabis Store estimates the move will put $35 million back in the hands of licensed pot companies this fiscal year and $60 million in the 2024 fiscal year. The OCS expects these amounts to compound annually in the years thereafter as the legal cannabis market grows.

The margin reduction will come from a fixed mark-up for each product category that will be standard for all producers and applied as a percentage above each product’s landed costs, which already take into account producers’ margins and excise taxes.

The margin drop was largely triggered by the strength of the illicit pot market, which still made up 43 per cent of Ontario’s cannabis market last March.

“This announcement will allow producers to better compete with the illicit market, particularly when it comes to dried flower,” said Charlie Bowman, chief executive and president of licensed producer Hexo Corp. in an email.

“This is an important step in giving Canada’s cannabis companies the upper hand over illegal producers.”

Pot producers getting squeezed
The average price for cannabis was $11.78 per gram at the start of 2019, shortly after legalization, but fell to $7.50 per gram in 2021, a November report from Deloitte Canada and cannabis research firms Hifyre and BDSA said.

The average price for vape cartridges has similarly fallen by 41 per cent from $32.02 per gram around legalization to $19 per gram a year later.

Pot producers, which are mostly unprofitable, have blamed illicit sellers, along with excise taxes and OCS margins, for a series of cuts they have made over the last few years. Many of them have laid off hundreds of staff, closed facilities, moved to rationalize their product mix and embarked on restructuring initiatives meant to reduce costs.

In the last week alone, Canopy Growth Corp., one of Canada’s most prominent pot companies, said it would lay off 800 workers as part of a transformation plan that will also include the closure of a former Hershey chocolate plant in Smiths Falls, Ont. it took over and the consolidation of some of its cultivation operations.

Then, licensed producer SNDL Inc. announced a layoff impacting 85 employees at its Olds, Alberta facility that it said would deliver $9 million in savings.

To combat further cuts and remain competitive with the illicit market, licensed producers have been slashing their prices, but complain the reductions are eating into their profits.

Changes won’t come into effect immediately
With prices in decline and profitability targets under pressure, licensed producers and retailers were pleased to hear about the Ontario Cannabis Store margin reduction.

However, the changes won’t come into effect until later in the year. The OCS said the delay is meant to give it and licensed producers time to consider changes to existing products and their release schedules.

But some have already made sense of the margin reductions and decided not to change their prices as a result.

“The OCS deserves credit for implementing these important changes which will accelerate industry sustainability and ultimately profitability as we intend to hold our prices due to the already highly competitive product pricing within the sector,” said Canopy Growth Corp. chief executive, in an emailed statement.

High Tide Inc., the cannabis company behind Canna Cabana stores, was equally pleased with the OCS’s decision, but said “more needs to be done especially by the federal government, to ensure the sustainability of Canada’s legal cannabis sector.”

“We look forward to further discussions with the OCS, regulators, as well as the federal and provincial governments about additional concrete measures that can be taken to ensure our industry continues to grow and create jobs while protecting public health.”