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How can Ontario Retailers Compete with the Illicit Market?

Many cannabis entrepreneurs welcomed the election of the Ontario PC Party government just over two years ago.  This was in large part because the previous Liberal government’s decision to limit bricks and mortar retail operations to government-run stores effectively shut out private enterprise from participating in Ontario’s retail cannabis sector. Ontario’s cannabis community should have given credit to the PC government for reversing this policy.

This reform, however, could have opened the door to major economic growth, but current policies still make it difficult for licensed cannabis retailers to compete with criminal enterprises.

Let us begin with the fact that Ontario simply doesn’t have enough licensed brick and mortar cannabis stores to meet market demand and compete with illicit operators. To date, the Alcohol and Gaming Commission of Ontario (AGCO) has only granted around 120 retail store authorizations (RSAs), while over 800 applicants remain stuck in the approvals process. This is largely because the AGCO has been directed to limit new RSAs to just 20 per month. The inability to grant RSAs at a pace that will allow licensed cannabis retailers to be present in every community has left a vacuum that is being filled by illegal, unlicensed dispensaries and delivery services.

Those licensed operators that do manage to receive their RSA still face significant hurdles when it comes to competing with the illicit market on price. The Ontario Cannabis Store (OCS), which is a government agency, continues to have a monopoly on wholesale while at the same time competing with licensed retailers for market share through its monopoly on online retail sales. The OCS charges licensed retail stores a markup which many operators say hampers their ability to compete on price with the illicit market, resulting in the continued resiliency of illegal dispensaries and delivery services.

Finally, licensed retail stores in Ontario do not have the ability to offer home delivery to their customers. Recent reporting by the Toronto Sun has revealed that at least four dozen illicit market operators are offering same-day delivery service to Premier Ford’s riding in Etobicoke. As the pandemic hit Ontario, the government moved to temporarily allow private retailers to offer e-commerce and home delivery options to consumers, which offered a lifeline to private business as retail sales plummeted. Unfortunately, as of July 24th these tools, which were effectively eating away at the market share of illicit operators have been taken away.

There are many reasons why fighting the illicit market should be a top priority for governments. According to the Ontario Chamber of Commerce, the province will lose about $180 million in economic activity because licensed cannabis retailers are not allowed to provide delivery or curbside pickup services.

The province will lose about $180 million in economic activity.

According to the OCC, this number rises to $1 billion as more storefronts open. This, in turn, will result in lower revenues for government and more money in the pockets of organized crime. There is also significant public health risk associated with the consumption of unregulated cannabis, where the product could be intentionally or unintentionally laced with other harmful substances.

Ontario’s government has said many times that it is committed to wiping out the illicit cannabis market. Ontario’s licensed cannabis retailers want to help the government do that, but they lack the tools to succeed. It is time for the provincial government to step up and support small business owners struggling to compete with the illicit cannabis market by removing the cap on new store authorizations, allowing licensed retailers to permanently offer home delivery through online sales, and by working with the OCS to ensure a more competitive pricing framework.

Failure to act now will only drive more consumers into the arms of the illicit market, resulting in lost jobs, decreased tax revenue, and negative public health impacts associated with the consumption of unregulated cannabis products.

Omar Khan is the National Cannabis Sector Lead at Hill+Knowlton Strategies and offers advocacy, regulatory affairs and communications advice to several clients within the cannabis industry.

Tags: AGCO (57), OCS (42), Ontario Cannabis Store (76)