Five years ago, the legalized cannabis industry was hailed as a huge economic opportunity. Today, the industry isn’t thriving. A new report from Deloitte, Clear the smoke, Insights to Canada’s illicit cannabis market, explores why.
The report looks at:
- The gaps between the illicit and legal market in terms of product offerings
- The key differences in the major product categories that are affecting where consumers shop
- The operational tactics that are helping the illicit market
- What else can be done to support a more viable and secure legal market in Canada
Depending on the data source, the illicit market is estimated to take anywhere from 25% to 52% of market share. This presents a considerable opportunity for legal cannabis companies and regulators to start collaborating to develop an appropriate response.
Key Findings
The most notable discovery the report made is the pricing gap for flower products: the average price differential is now only about 20%. The pricing gap between the legal recreational and illicit markets has narrowed significantly from the 55% measured by Statistics Canada in Q4-2019.
Other key findings from the report include:
- Unique SKU count was higher for illicit websites, and they had a significantly higher average SKU count than the legal recreational stores.
- Illicit websites were over-indexed on flower and extract products and under-indexed on pre-rolls, beverages, and vapes compared to legal recreational stores.
- The standard size format in the legal recreational market was 3.5 grams—60% of its flower products were offered in this size—whereas the illicit websites had a relatively even distribution of size varieties at 3.5 grams and larger.
Unique SKU Count
Legal recreational stores had an average unique SKU count of 538 per store while illicit websites had an average of 918.
Excluding accessories, the count narrows to 357 for legal stores and 591 for illicit websites, indicating a greater volume of accessory products in the illicit market.
The report attributes the wider variety of SKUs in the illicit market to a variety of factors including:
- No purchase limits
- Greater strain variety for inhalable products
- Illegal psychedelic products being offered
- Greater format variety especially for edible products as there are no limits on THC potency
Product Categories
Inventories for illicit websites are over-indexed on flower products compared to legal recreational stores.
The report suggests this is partly due to:
- Lower pricing than the legal recreational market
- The ability to sell at a higher volume and above the 30-gram limit
- Greater strain variety
- Previous research shows the illicit market has more experienced and educated cannabis users who have a stronger preference for flower products over novel categories
Extracts are also over-indexed on the illicit market. Comparatively, over-indexed categories in the legal market include those that are more complex to manufacture at scale, so they are not as appealing to low-cost illicit producers—like vapes, pre-rolls, and beverages.
These products are also generally more appealing to new or inexperienced cannabis users, who prefer discreet consumption methods.
Flower Package Sizes
The report found that illicit market flower variety is evenly distributed in 3.5-gram and above size varieties, while the legal recreational market is highly concentrated on the 3.5-gram size.
Other findings include:
- Both markets offer most of their flower products at 3.5 grams and above, indicating little interest in smaller package sizes in either market.
- The largest category in the illicit market is 28 grams.
- Three sizes collectively represented 88% of all flower products offered in the legal market – 60% in 3.5-gram packages and 14.4% each for 7-gram and 28-gram packages.
Operational efficiency is likely the driver of 3.5 grams being the standard package size for flower products in the legal market as illicit sellers have no reason to adhere to packaging guidelines.
Flower Pricing
Illicit market flower products cost about 20% less than legal products across all size categories. The pricing differential between legal recreational stores and illicit websites is highest for the 3.5-gram size.
The report notes that pricing is a major strain on legal producers and has been cited as a primary factor in the overall decline of the Canadian cannabis industry’s revenue and profitability.
While the price differential between the illicit and legal market has shrunk since 2019, the perception of cheaper prices on the illicit market is likely to still have a pull for cannabis users.
Other Illicit Market Insights
Beyond the key insights shared above, other observations of the illicit market include:
- Most reviewed websites use Canada Post as the primary method for shipping orders.
- All sampled websites offered e-transfer as the primary payment method, with some sites also accepting bitcoin or cash.
- The majority of websites had no age-gating on entry, though some asked customers to confirm they were of legal age prior to purchase.
- Illicit drugs were offered on 63% of the websites.
- A significant volume of products, primarily accessories and flower strain names, incorporate common television, film, and other media brands. While unlicensed, this could be a draw for customers.
- All the websites selling illicit cannabis added tax for all products at checkout. It’s uncertain whether these taxes are remitted.
Read the full report here.