How players are jockeying for position in Canada’s nascent pot market

This week’s federal report recommends taking steps to foster variety and consumer choice in the fledgling industry—but big consolidators are circling

Mark Zekulin, president of Canopy Growth Corp.

Mark Zekulin, president of Canopy Growth Corp., Canada’s largest licenced producer of marijuana. (Sean Kilpatrick/CP)

The federal health department released its highly-anticipated task force report on marijuana this week, providing clues as to what Canada’s recreational cannabis laws will look like.

The report’s recommendations are not binding, but it does help to illuminate the path ahead for the entrepreneurs who have entered the fledgling marijuana market in recent years. That includes players operating at varying levels of legality, from the 36 licenced producers responsible for growing and supplying medical marijuana, to scores of dispensary owners currently operating illegally in a number of Canadian cities.

“Producers should be excited that about what this means for expanding their business,” says Trina Fraser, a lawyer with law firm BrazeauSeller who has counseled clients applying to be medical marijuana licenced producers. “We need to be able to produce [and sell] these products in such a way that competes with the illicit market,” she says, adding that she finds the report encouraging in that regard.

In terms of business opportunities in the market, the task force doesn’t explicitly state who will and will not be able to produce and sell cannabis. It does, however, suggest that production will likely continue to be regulated by the federal government, which requires all aspiring producers to go through a strict application process. The provinces and territories, meanwhile, will be responsible for retail and wholesale distribution, and will determine whether the distribution portion of the supply chain will be government-controlled or licenced to private sellers.

But the task force made clear the intention is to foster an industry where small-scale “craft” or “artisanal” producers are able to participate (including individuals who can grow a maximum of four plants for personal use) among larger players. It recommends taking steps to avoid “the development of monopolies or large conglomerates.”

While this wording is vague, it gives Mark Carnevale, co-owner of Bellwoods Dispensary in Toronto, hope that the dispensary model may be legitimized through legalization. The suggestion that marijuana will not be sold through existing government-run liquor retailers or any place where tobacco is sold likewise suggests that there’s some opportunity in retail storefronts.

“By eliminating an LCBO model and eliminating a convenience store model, I think the logical step is to embrace the dispensary model,” says Carnevale. “Especially if you have dispensaries that operate as boutique outlets. I think there are consumers looking for good quality, specialty products rather than just your generic run-of-the-mill weed.”

That’s a hunch that Alan Gertner shares. It’s the reason he created Tokyo Smoke, which he’s positioning as a luxury marijunana brand. Gertner, who left a job with Google to start the Toronto company two years ago, was, like Carnevale and hundreds of others, attracted to the industry for its potential.

“We believe that in the marijuana market, there will continue to be stratification,” says Gertner. “There are many consumers searching for a home; for a reliable brand that delivers high quality product.” Unlike dispensaries, however, Tokyo Smoke now operates legally—it sells high-end cannabis paraphernalia, but not yet the drug itself. Instead, the company teamed up with existing licenced producers—one in Canada starting in 2017, and two others, in Washington State and Colorado—to market their product (for medical or recreational use, depending on the jurisdiction) under the Tokyo Smoke brand.

While Gertner says the option to sell cannabis from his shops would be nice, it isn’t crucial for his business model. “If we’re lucky enough to be able to sell in certain markets, we will do that,” he says. “If it remains the case that our stores are showrooms and we can sell through a government store, that’s OK with me as well.”

Whatever the retail model ends up being, distributors will have to apply for a special licence to participate. And while retail may eventually look similar to the dispensaries of today, Ronan Levy is doubtful that the ones operating now will easily become licenced. “I think it would be inappropriate from a policy or legal perspective to give these people who have been operating outside of the law to a head start in a retail market. That’s not the kind of behaviour you reward through governments,” says Levy, a lawyer and an executive director of Canadian Cannabis Clinics. “Dispensaries that exist right now, while they’ll be entitled to seek approval to becomes a true dispensary under a legal market, I think a lot of them will be disqualified by virtue of the fact that they won’t necessarily meet the regulatory requirements I presume the government is going to bring forth.”

The need to meet robust licencing requirements (often a multi-million dollar process) is something the government will have to weigh against its intention to carve out a space for boutique cannabis production and retail—something the task force vice-chair Anne McLellan noted as a point of concern for a number of advisors to the report, particularly in light of major consolidations among licensed producers. Early this month, Canopy Growth Corp., the largest legal marijuana producer in the Canadian market, announced it was buying competitor Mettrum for $430 million. Separately, the two companies have already gobbled up a number of smaller players in the industry, and together they control nearly half of Canada’s medical marijuana market. Soon, presumably, they will control a large portion of its recreational market, too. Canopy’s stock jumped 7.9% on Tuesday, suggesting investors aren’t concerned that craft cannabis will threaten its market share. “This report is good news for Canadians and in our view provides a strong policy framework for the government to consider,” Canopy CEO Bruce Linton said in a statement.

More than 80 recommendations for regulation are outlined in the report. And the federal government says Canadians can expect a legal recreational market by early 2019.

“There’s huge opportunity here, and I think everybody deserves a piece of this, provided that we all play by the same set of rules,” says Carnevale.