In order to maintain control over the sale of cannabis in Ontario, and to further quell the illegal market, the province’s cannabis retail regulator, the Alcohol and Gaming Commission of Ontario (AGCO), recently distributed communication to licensed cannabis retailers warning them against selling their product to illicit buyers.
In the communication from the AGCO, licensed retailers were cautioned not to sell product to “unlicensed third parties upon the closure of the store”. It comes on the heels of the introduction of Leafythings to the market—the self-proclaimed “web platform, mobile application and advertising medium” which just last month announced that it would be initiating a “retailer support program” in order to assist the purveyors of cannabis during these harsh economic times.
One of the ways in which Leafythings proposes to assist cannabis retailers in Ontario, and the crux of the support program, is according to Jeffrey Neil, Leafythings’ Director of Community Engagement, is through, “buying all available inventory from stores who wish to wind down in a timely fashion.”
Breach of Regulations
It’s an offer that Leafythings says has been met by cannabis retailers with tears of relief. However, it’s one that has caught the attention of the AGCO. And, according to Stephen Verbeek, President and CEO of Ontario-based Hello Cannabis, the reasons as to why are quite obvious.
“They’re offering support to retailers that were shutting down,” he says. “They buy the inventory in bulk from the retailer. I have not heard firsthand from anyone who has used their services. I’m basing this solely on the notice the AGCO sent to other licensed retailers regarding this practice. There are limits to the amount a single person or entity can purchase in one day. There are numerous ways to get around this in more reasonable cases. However, purchasing the entire vault of inventory in bulk seemed to be aggressively breaching this rule.”
In addition to the obvious breach of regulations with respect to the quantity being purchased, Verbeek points to Leafythings’ potential use of the product after purchase as another red flag.
“The entire inventory being purchased is likely not going to be used solely for consumption by the purchaser,” he asserts. “Therefore, the AGCO would presume that it is being resold again which is another illegal practice according to regulations.”
The AGCO agrees. In its communication to retailers, Leafythings’ program was called out for operating “outside of the regulated market,” stating that it was the regulator’s understanding that the program “involves the solicitation of cannabis retailers for the purpose of purchasing cannabis in bulk by unlicensed third parties upon the closure of the store.”
Communication from the AGCO went on to explain to licensed retailers that they must comply with the law in order to “ensure there is no diversion of legal cannabis product to the illicit market. Failure to properly dispose of inventory before you close may result in compliance activity by the AGCO or action from other law enforcement agencies.”
A Service That’s Needed?
Though he recognizes the clear illegalities involved in Leafythings’ pursuits, Verbeek laments the lack of a similar service within the market.
“There is certainly a need for this type of service,” he admits. “If you are shutting down and are holding 10 to 100 thousand dollars worth of inventory that can only be sold through your store, it’s another kick in the teeth after losing hundreds of thousands of dollars, or millions in some cases.”
In fact, at the moment, Verbeek suggests that cannabis retailers are extremely limited with respect to options to offload inventory in the event that their operation fails.
“I’m not sure how it’s possible to offload inventory legally if you’re closing your doors other than putting on a closing sale, like any other retailer that’s stuck with inventory prior to closing has to do. Closing sales are rather common these days for any retailer. If I walk into a furniture warehouse that’s about to close, I can likely buy the entire lot at a very steep discount legally. However, that’s not possible in cannabis retail right now. There’s a need for this type of service that’s only likely to increase. Stores are closing, and more than half of the retailers are not profitable. This business is not for the faint of heart. There are almost no barriers to entry anymore. This will always lead to tighter margins and stiffer competition.”