A recent study by EY Parthenon discovered that in Ontario government taxes and provincial mark-ups represent 46.6% of the price of a basket of legal cannabis products including 1g flower, 1g pre-roll, 750mg vape, and 10mg edible. Licensed producers (LPs) only capture 27.1% of the selling price in the value chain while the illegal market would capture the full selling price. The report was based on data collected from July 2021 to April 2022.
A breakdown of the retail price of this basket of cannabis products shows what share each player in the supply chain receives:
Legal vs. Illegal Price Comparison
With the high degree of taxation and fees, the price of cannabis purchased from legal retailers is uncompetitive when compared with untaxed illicit products. The gap becomes even more significant for vapes and edibles. Following are the price differences between legal and illegal products.
Flower $0.15/g – 2.2% cheaper
Vape $11.28/750mg – 24.3% cheaper
Pre-roll $1.37/g – 15% cheaper
Edible $7.13/10mg – 90% cheaper
How can legal retailers be expected to compete when the illegal sector can sell cannabis so cheaply?
With this competition, there is great pressure on LPs to reduce their prices and value brands have been entering the market over the past few years. The report notes that LPs’ share of net sales decreased from 74.2% in July 2019 to 60.8% in April 2022 while federal and provincial excise duties increased from 23.9% to 37.6%!
There are exceedingly few producers that are in the black and most are bleeding red by the millions and billions of dollars. This situation is totally unsustainable, and many LPs are facing bankruptcy or have already gone under. Unless the tax system is addressed and brought down to a more reasonable rate, the industry will not be able to survive.
EY Parthenon recommends a number of future policy considerations if governments truly want to eradicate the illicit market and get unsafe products out of the hands of consumers, including youth. Federal and provincial excise duties need to be reduced and governments need to move to a harmonized national excise stamp while eliminating the provincial/territorial stamps.
Another recommendation is that taxation on Cannabis 2.0 products needs to be reduced to incentivize the public towards these healthier consumption formats.
Furthermore, potency limits on edibles, including beverages, need to be revisited, so consumers can purchase a reasonable number of products in a package and in one purchase.
Marketing prohibitions need to be revised so that LPs are able to communicate the characteristics and effects of their products. They also need to be able to build a brand, which is currently almost impossible given the packaging and labeling restrictions. Illicit products are much more attractive and provide more detailed (although not necessarily accurate) information about the products.
Government also needs to launch a public awareness campaign on the health risks and danger of purchasing illicit and untested cannabis products. This would be a great use of the millions of dollars that have been collected and were supposed to have been used for education.
Finally, there needs to be increased enforcement to eliminate the illicit market that is servicing the public with storefront and online stores.
The industry hopes that governments will address these issues shortly, so that producers and retailers can start making money.