Recently, the large consulting firm EY pulled together a bunch of new data and it confirmed a troubling trend, and that is the lack of profitability in the regulated cannabis space.
In my conversations with licensed producers (LPs) and retailers alike, the thin margins left after government fees, taxes, and mark-ups don’t add up to enough to make the businesses viable in the long term.
This report is the most recent in a series over the past few years, that inform a narrative that goes something like this. Deloitte, with support from the Ontario Cannabis Store (OCS), produced a report that measured the economic impact of cannabis during the first three years of legalization. That report showed the staggering numbers that cannabis investors put on the board as our industry expanded at the producer and retail level.
The key numbers from the report: $43.5 billion boost to GDP, with 151,000 jobs impacted, and 43,000 direct jobs created. I think we would all agree that these are not small numbers and the fact that they were widespread in the regions of Canada and that much of this occurred during COVID really shows what an economic driver the sector has been for Canada.
Impact of the Excise Tax on the Financial Viability of Companies
Following on the heels of the Deloitte report, the Cannabis Council of Canada (C3) members were increasingly pointing out that, despite the huge investments made, the pie was not being distributed in a way that protected the long-term interests of all involved, not just the governmental players. C3 engaged EY to take a harder look at the impact of the excise tax implication on the financial viability of the Canadian cannabis sector and they came back with a troubling picture.
The EY report was released May 2022 at the Grass on the Hill lobby event in Ottawa and shed light on a lot of things, but the key spotlight was on the combined governmental effect of 50% of end-product cost or more! In particular, the report highlighted that the current excise tax framework is so flawed that even while the value of cannabis has degraded significantly in the past few years, the excise tax hangs in at rates two or three times than the 10% excise tax that was referenced in the run up to legalization. Depending upon the categories that a company focuses on and where their products are positioned to consumers price-wise, it is not uncommon to see effective excise tax rates of 35-55%, not including mark-ups and other fees.
For C3, the economic viability of the sector is issue one, two and three! If we cannot achieve a model that rewards milestones of success with profit like other sectors, then who is going to be around to bring innovation to the market to help win the battle against the illicit market and to fulfill the public health and safety of the Canadian cannabis consumer?
What is Government’s Reaction?
As the representative of an industry association, it is sometimes hard to tell if we are making much progress towards our goals, but so far this year both the Prime Minister and Deputy PM Chrystia Freeland in her 2023 Budget have acknowledged the economic contributions we have made and the challenges that we are currently facing. The Federal Budget missed the opportunity to back up those words with action though. They also did not eliminate the special regulatory tax of 2.3% that cannabis producers pay, unlike tobacco, beer, wine, and spirit producers, nor did they take action on the bigger issue, which is for immediate reform of the excise tax.
Results from EY’s Report
Maybe EY’s most recent report, Canadian Cannabis: State of the Industry, will help to further the discussion and progress for the cannabis sector. Data-driven analysis highlighted that there are 3,000 cannabis retail stores in Canada. The study further revealed that fully 58% of Cannabis CEOs feel as though they are not meeting established goals. One area that did stand out as promising is the year-over-year exports of Canadian medicinal cannabis which is growing at more than 70%. As more medical cannabis markets emerge, Canada is well placed to meet supply needs.
Thankfully, the report helped to emphasize many of the challenges that we face as a sector in helping to fulfill the public health objectives that motivated legalization in the first place.
One number that I really think is impressive is total retail sales of $4.7 billion. That is an accomplishment in its own right, but considering that such growth has been achieved in a period of rapid price decline for many cannabis formats really puts our shared accomplishment in perspective. And with that in mind, and even though we all know we are in a very tough sector at the moment, we have lots of growth in front of us. Now if we could only convince our governments to be more partners and less profit takers!
George Smitherman is President and CEO of the Cannabis Council of Canada.