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AG Report Issues Still Unaddressed

The Canadian cannabis industry is growing quickly—so quickly that it seems to be posing challenges to some in their efforts to keep up. In fact, nearly a full year following the release of the Office of the Auditor General of Ontario’s annual report, there remain unaddressed concerns over the effectiveness of the Ontario Cannabis Retail Corporation (OCRC). According to Daniel Safayeni, Vice President, Policy, Ontario Chamber of Commerce, the list of concerns is lengthy and deserves further scrutiny in order to remedy some of the more pervasive issues that are threatening the viability and profitability of the sector.

“We have to give our regulators and the government some benefit of the doubt with respect to the way they’ve handled a brand-new industry that’s trying to displace an entrenched illegal market that’s been around for nearly a century,” he says. “So, we understood that there were going to be growing pains and issues from the start. But, since legalization happened back in 2018, organizations like ours and others have been flagging issues related to the basic regulatory structure of the market in Ontario, which relies on one government-run wholesaler and distributor in the province. From the start, we’ve called out the pacing of store authorizations. We’ve also flagged issues related to ecommerce and the fact that retailers don’t have the ability to deliver directly to their consumers like their illegal competitors, or how the government is able to through the Ontario Cannabis Store.”

Issues Repeated

Safayeni goes on to explain that the Ontario Chamber of Commerce and others have also tried to bring attention to issues related to the OCRC’s margins, pricing and listings, and a general lack of transparency around how the Ontario Cannabis Store, as a government-run and taxpayer-funded, arms-length government agency, is being run. He points to the Auditor General’s report released in December 2021 as a document that thoroughly substantiates the concerns that many have been raising for more than four years now, adding that the report even called out the OCRC’s governance and handling of data, an issue that once again reared its head around a potential data breach back in August of this year.

“Within the report, the OCS’s data governance models and oversight of third-party delivery agents were heavily critiqued,” he asserts. “After the report, OCS’s partner—Domain Logistics—was behind the shambolic stoppage of delivery that left producers without a way to deliver their product and retailers without a means to sell legal cannabis to consumers. It was all confirmed in the AG’s report. And, the OCS agreed with its findings. There were 16 recommendations made to improve operational effectiveness. And the OCS said that it was going to work to address them.”

Reassessment Required

When considering such an important sector, one that’s presenting financial benefits as significant as those cultivated by the cannabis industry in Canada, one would think that government should perhaps make it a priority to ensure its viability and profitability. However, Safayeni has doubts that there’s any urgency being shown at all. In fact, he believes that all stakeholders involved should put their minds together soon to really dig into the issues that are impacting the cannabis industry in the country in order to set it up for success.

“First, it would be good from a general transparency perspective for the OCS to provide a fulsome update concerning where they’re at with respect to all 16 of these recommendations,” he says. “It’s something that they’ve committed to doing. We just haven’t seen anything yet. But, now that the market has matured a little bit, I really think that we should be having a frank discussion in the province about what the role and the mandate of the Ontario Cannabis Store should be.”

Supply Vulnerability

It’s not to imply that there isn’t a role for the OCS going forward, adds Safayeni. However, perhaps it doesn’t include its prominence as the wholesale purchaser and distributor of cannabis in the province, especially when there are private sector firms willing to do that more reliably and at a lower cost than it’s currently being done. And, again, he cites the cyberattack suffered by Domain Logistics as a great reason that supports the reassessment of the current structure of cannabis supply within the province.

“The recent delivery stoppage, which came at a particularly bad time for the industry, highlighted the vulnerability in Ontario’s cannabis supply chain,” he explains. “Right now, the OCS is acting as the only bridge between the producers of cannabis and the legal retailers. And when that bridge breaks, as it did in August, producers can’t get their product into the hands of retailers, and retailers can’t sell consumers the products they’re looking for and may very well turn to the illegal market to satisfy their needs. It manifests into a public safety risk for us as a society, making these types of issues incredibly important to address.”

Supplanting the Illegal Market

On the note of public safety, one of the OCS’s stated purposes is to educate consumers concerning the differences between legal and illegal cannabis. It’s another area that Safayeni says was highlighted within the AG’s report, and another issue important enough to elicit a response from government in order to meet its own mandate and position the legal cannabis industry for further growth and success.

“The OCS received direct funding to undertake education initiatives to inform the general public concerning the hazards and risks associated with purchasing products that have not been regulated by Health Canada and that have no safety procedures around them like legal cannabis does. It’s clear that they’ve got to do more around education. Currently, nearly half of the cannabis that’s consumed within the province is purchased through the illegal market. In order to nurture the legal industry, helping it to thrive and supplant the illegal market, much more work needs to be done in this area.”

Issues to be Addressed

These are the issues within the Ontario Auditor General’s December 2021 report that have been flagged by the Ontario Chamber of Commerce:

  • OCRC has experienced a high turnover of its senior executives, with four CEOs in three years and two short-term interim presidents appointed in April to August 2018.
  • OCRC has been making slow progress in promoting social responsibility in connection with cannabis. It did not establish a Board-approved social responsibility strategy until November 2020. OCRC does not have sufficient age verification controls in place to prevent minors from purchasing cannabis from its online store or from receiving cannabis product deliveries, and it does little to educate the public about the difference between regulated cannabis products and those sold on the illegal market.
  • Weaknesses in some of OCRC’s operating processes include product listing and pricing, sales forecasting and response to customer inquiries and complaints.
  • Until April 2021, OCRC did not use any formal criteria to evaluate product submissions, resulting in non-transparent decisions about products selected for sale. OCRC’s decision to change from a fixed mark up to a value-based pricing approach for listed cannabis products is not based on sufficient analysis and is not transparent to licensed producers.
  • OCRC does not have a formal appeal process for product listing decisions. Senior management sometimes reverses product listing rejections without formally documented rationale, contributing to a perceived lack of fairness by licensed producers.
  • Inaccurate inventory forecasting has contributed to products being out of stock; product availability has been a common complaint from retail stores.
  • OCRC’s recent transition from outsourced to in-house customer care staffing has resulted in longer wait times for inquiries, claims, and complaints due to a 50% reduction in dedicated customer care support as well as more retail stores.
  • OCRC outsources most of its supply chain operations, including warehousing and product distribution operations to a third-party service provider. OCRC does not have effective oversight of services provided by this major service provider. OCRC’s arrangement with this service provider to lease equipment does not provide value for money
  • OCRC does not have effective mechanisms to oversee the use, retention, and safeguarding of customer information retained by its service providers.
  • Over a half of its procurements since January 2019 have been non-competitive. OCRC does not have documentation to support its decisions to procure non-competitively.
  • OCRC does not yet have a consistent set of nonfinancial performance metrics. Many of the targets OCRC has set for itself have been vague, difficult to measure, or moving targets. OCRC does not regularly report and discuss operational performance with its Board using consistent metrics, dashboards or scorecards.
Tags: Canadian cannabis industry (60), cannabis regulation (10), Cannabis Retail (387), Daniel Safayeni (5), Office of the Auditor General of Ontario (1), Ontario Cannabis Retail Corporation (5), Ontario Cannabis Store (76), Ontario Chamber of Commerce (4)