Article by Dan Sutton, Straight Cannabis
Liquor distribution boards across Canada have been tasked with a lofty mandate when it comes to cannabis—capture market share from one of the most entrenched unregulated cannabis markets on the planet, and do it fast. Their collective first instinct follows understandable logic: buy cannabis for a low wholesale price, and sell it for a retail price that the vast network of illicit growers across this nation cannot compete with. This strategy will substantially benefit high volume producers of commodity grade crops, while crippling the competitiveness of small scale growers.
The cost burden of compliance to the Access to Cannabis for Medical Purposes Regulations (ACMPR), tax, and extreme distribution margin expectations make undercutting the illicit market an unwinnable fight, especially for small regulated growers. Challenging the illicit market solely on cost will also inhibit market diversity along the way. Simply put, if the only differentiator is lower prices, it is a war that cannot be won.
Licensed producers underreport costs
Firstly, the British Columbia Liquor Distribution Board (BCLDB) in particular suggest they have transparency on “production costs of publicly traded producers that we know, that we rely on, as we work through our supply agreements and our pricing models.” These public disclosures alone are not an accurate benchmark, for a few reasons. Even the large licensed producers (LPs) who claim they can grow for $2 per gram cannot actually sustain a business selling at that price.
LPs carry substantial costs not associated with illicit production, and their desire to appear competitive to shareholders incentivizes them to downplay these burdens. In the interest of fostering demand for their shares on the public markets, LPs use accounting methods that pull costs such as tax, packaging, lab testing, security operations, quality assurance, sterilization, pest control, management, human resources, technology, e-commerce, finance, marketing, legal, accounting, design, community outreach, public relations, government relations, investor relations, product education, amortization, depreciation, and administration out of their reported cost-per-gram.
The lower an LPs cost per gram appears in public disclosures, the more competitive an LP appears to their shareholders (and moreover prospective shareholders). Any financial professional who has studied the ACMPR can attest to the reality that cost accounting is subjective at best, and blatantly underreported in many cases.
“Cheap” does not sell
The largest market cap companies in the ACMPR also enjoy substantial economies of scale. What can hypothetically be produced for an all-in cost of $3 per gram at 500,000 square feet of production space might cost $7 per gram at a canopy of 5,000 square feet. Small regulated growers are likely even smaller than this, and their participation is essential for a diverse and inclusive marketplace.