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Why is the OCS cheaper than retail stores?

It costs over $2 more per gram to purchase cannabis from a private retailer versus the Ontario Cannabis Store (OCS). In their latest report, the OCS shared that their average price per gram for retail cannabis was $7.48, compared to retail stores coming in at $9.61.

The OCS works as both a wholesaler and a retailer. Private retailers are required to purchase their products from the OCS, and consumers can purchase from either. This might appear to be undercutting their business-to-business customers, but according to the OCS, it keeps prices down for everyone.

“OCS wholesale pricing to authorized retail stores is set at a fixed 25% markdown from OCS.ca prices before taxes to ensure a transparent and level playing field,” the report reads. “The OCS fixed wholesale markdown was established to provide retail stores with reasonable margin levels to manage their operations consistent with other retail industries.”

If you crunch the numbers, that does appear to be the case. In April 2019, the average price per gram in a retail store was $10.62. If those stores purchased their product from OCS at the wholesale rate of $7.11 per gram (25% of the OCS average price, $9.48), they would be making $3.51 on each gram. By the end of March 2020, retailers made an extra 50 cents per gram, bumping their gross profit up to $4.00 with an average price of $9.61 on the OCS wholesale price of $5.61 (25% of the OCS average price, $7.48).

The aggressive price cut resulted in not only a small boost for retailers but savings for consumers as well – $1.01 per gram, to be exact.

In a Reddit AMA (Ask Me Anything) by Cheri Mara, Chief Commercial Officer for OCS, she said that on principle, the OCS believes in providing as much access to legal cannabis as possible.

“Stores are not our competition but our partners in growing the size of the legal market,” Mara wrote. “We designed our pricing to eliminate the risk of undercutting stores.”

Why is Cannabis More Expensive in a Retail Store?

There are many reasons why cannabis may be more expensive in a retail store. There is the initial cost to design and build a store, more overhead costs and fees, not to mention keeping the store stocked with products and hiring quality budtenders who can answer questions and create a fun atmosphere in the store.

Often, this in-store experience is what keeps customers coming back. Data from the OCS report shows that several times as many grams were sold in-store than were sold online by OCS. Some consumers are uncomfortable ordering online or don’t have a credit card to order with, and some don’t want to have to wait days for their order to arrive in the mail.

If you ask the Ontario Chamber of Commerce, however, they say it’s not quite that simple. They have been lobbying for the OCS to let private retailers have relationships with Licensed Producers (LPs) to allow for more competition and further cripple the illicit market.

How Can Prices be Driven Down?

“Part of the issue here is, to a degree, retailers are the price takers,” says Daniel Safayeni, Director of Policy at the Ontario Chamber of Commerce. “They’re at the end of the supply chain; they’re selling their product after they’ve purchased it from the OCS. As a result, they have less room at that point in the game to drive efficiencies, whereas if you allowed a private retailer to interact directly with an LP and determine their own product mix, distribution, and supplier arrangements, prices could be effectively driven down.”

Safayeni says that more competition and efficiencies in the supply chain for private retailers could not only provide more value for consumers and profit for businesses, but it could also stimulate economic growth for the province and country as a whole.

“We have the opportunity to do some very innovative and unique things as the first G7 country to legalize, but we need to get it right here at home first,” he says. “We need a regulatory regime that fosters a fair, regulated market with price differentiation, convenience, and access.”