The legal cannabis market in Ontario is on the verge of surpassing $2 billion in annual sales and is Canada’s largest cannabis marketplace according to new data from the Ontario Cannabis Store (OCS).
The OCS is the government’s exclusive wholesaler of recreational cannabis to private retail stores authorized by the Alcohol and Gaming Commission of Ontario and operates the provincial online store for recreational cannabis. It recently released its Annual Report for the fiscal period from April 1, 2022 to March 31, 2023.
Record Growth
The OCS has seen consistent growth year-over-year in legal market capture, net income, and revenue.
The marketplace evolved substantially in 2022-23. During the first two fiscal quarters, activity across the province increased rapidly as Ontario took steps to recover following the pandemic, which helped drive record growth of legal cannabis sales.
Legal cannabis sales in Ontario since legalization reached $1.847 billion.
Legal Market Capture
In 2022-23, the OCS captured 59.8% of the legal market. It helped facilitate the growth of Ontario’s legal marketplace achieving $1.43 billion in wholesale sales through the distribution of 86 million units or 315,000 kg of cannabis products across Ontario.
According to a survey the agency conducted, 59% of frequent cannabis consumers agreed that purchasing cannabis legally is preferable to illegal purchasing.
Five years after legalization, combatting misinformation and presenting the facts about cannabis remains a top priority. In 2022, the OCS launched Cannabis Made Clear, an educational hub aimed at equipping Ontarians with the knowledge needed to make informed decisions about cannabis. The organization also introduced another Buy Legal campaign to promote Ontario’s Authorized Cannabis Stores.
Net Income
Fiscal year 2022-23 was the most profitable year to date for the OCS. The agency generated $234.2 million in net income. This represents an increase of $49.8 million, or 27% compared to $184.4 million in 2021-22. This was also the fourth consecutive year of profitability for the OCS.
Revenue
The OCS generates revenue through two distinct customer channels: its wholesale distribution business (through which Authorized Cannabis Stores purchase product from the OCS to resell to consumers) and its e-commerce business on OCS.ca (through which consumers purchase products directly from the OCS).
Total revenue in 2022-23 reached $1,474.5 million, marking a growth of $293.7 million compared to $1,180.8 million in 2021-22.
The gross margin, calculated as the revenue from both channels (wholesale and OCS.ca) less product, delivery and transaction-fee costs, amounted to $323.3 million, representing 21.9% of total revenue.
Wholesale Revenue
By the end of 2022-23, the wholesale channel accounted for 97.1% of total revenue, compared to 93.8% at the end of 2021-22. Wholesale revenue was $1,431.2 million in 2022-23, compared to $1,107.8 million in 2021-22, an increase of 29.2%.
During the fiscal year, the OCS saw a notable change in the product mix purchased through its wholesale channel, with customers increasingly favouring products other than dried flower.
While dried flower continues to represent the largest sales category, accounting for 42.7% of revenues in 2022-23 (compared to 53.9% in 2021-22), the OCS saw significant growth in other product categories, notably vapes and concentrates, and pre-rolls. The agency says, “This shift can be attributed to the continued diversification of the OCS’s product catalogue throughout the fiscal year, which provided customers with greater choice and alternatives to dried flower.”
OCS.ca Revenue
OCS.ca revenue for 2022-23 was $42.8 million compared $72.7 million in 2021-22. The year-over-year revenue decrease of 41.1% reflects a 0.3 million decrease in the total number of orders to 0.5 million (compared to 0.8 million orders in 2021-22), with an average order value of $83.95 (compared to $87.59 in 2021-22).
The OCS says, “This decrease was mainly driven by a shift in consumers purchasing through Authorized Cannabis Stores and a prioritization by the OCS of improvements to its wholesale platform over OCS.ca.”
In 2022-23, OCS.ca revenues from the dried flower category totaled $16.1 million or 37.6%, a notable decrease in sales from $36.2 million (or 49.8% in revenue share) in comparison to 2021-22. Like in the wholesale channel, the OCS.ca channel’s dried flower share of revenue mix declined as the OCS continued to increase the diversity of product offerings in other categories.
Similarly, vapes, pre-rolls, and edibles continued to increase in popularity in 2022-23. These categories saw a notable increase in revenue mix share but an overall decline in revenues.
Beverages, topicals, and oils and capsules are continuing to see increases or stability in revenue mix share. Cannabis accessories made up the remainder of sales on OCS.ca, although they saw a drop in the overall sales mix as compared to 2021-22.
Store Count
During the past fiscal year, the OCS onboarded an additional 345 Authorized Cannabis Stores, growing the total network to 1,661 stores in 351 communities across the province.
The rate of store closures also began to accelerate with 144 closures in 2022-23. However, the rate of store openings continued to outpace overall closures, with a total of 201 additional stores operating as of March 31, 2023, compared to the previous year. The North and Greater Toronto Area (GTA) regions experienced the most growth, with rates of 30.6% and 24.7%, respectively.
The ongoing net growth of Ontario’s Authorized Cannabis Store network has continued to support year-over-year increases in the OCS’s wholesale revenues.
Partnering with Licensed Producers
The OCS partnered with an additional 90 licensed producers (LPs) during the last fiscal year, the vast majority being smaller businesses. It partnered with a total of 239 LPs to offer 2,950 unique products.
As of March 31, 2023, the OCS held $113.5 million in inventory (compared to $74.9 million the prior year). Inventory levels increased year-over-year due to overall increases in revenue primarily driven by increased SKU availability, fulfillment method additions, and the nominal net increase of Authorized Cannabis Stores across Ontario.
In addition, the OCS increased product offerings by 46.5% year-over-year to meet evolving consumer preferences and demand for a diversification of product offerings.
Economic Conditions
Broader economic conditions throughout 2022-23 had a notable impact on the cannabis industry including rising interest rates, ongoing supply chain disruptions, and higher levels of inflation.
The OCS says, “In contrast with the rising costs of goods across most other sectors, prices of legal cannabis products remained flat, or declined due to further price compression, given the level of competition across the retail cannabis marketplace. Nonetheless, broader economic conditions impacted operating costs for participants across the sector, including the OCS, Licensed Producers, and Authorized Cannabis Stores. In response, the OCS made a strategic decision to absorb its increased costs of service, including higher retail delivery and distribution costs. The OCS also looked for opportunities to improve the conditions for its partners, including through modifying its processing time for payments to Licensed Producers, and prioritizing the development and release of its new pricing strategy.”
The agency also saw an increase in restructurings, consolidation, or market exits among LPs.
Increased Price Transparency
In Q4, the OCS announced it was transitioning away from a variable pricing approach toward a fixed mark-up pricing model to “increase transparency into how wholesale pricing decisions are made and provide greater consistency for Licensed Producers.”
The OCS also announced it would be reducing its margins, stating “Reduced margin levels are expected to support a vibrant marketplace that is better positioned to compete with illegal operators. Consistent with its commitment to social responsibility, mark-ups will be strategically lowered to encourage consumers to purchase products that do not require smoking or vaping, such as edibles and topicals. However, the margin on dried flower will be the lowest of any product category to compete effectively with the illegal market.”
Once implemented in Q2 of 2023-24, the OCS estimates that these margin reductions will contribute approximately $35 million into the marketplace in 2023-24, with a full fiscal year reduction in 2024-25 estimated at approximately $60 million and compounding annually in years thereafter as the market grows.