As Canadian Provinces Seek the 'Right' Price for Pot, How It's Sold Could Matter

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Taxation isn't the only factor in the quest to undercut black market prices.

Provincial finance ministers are getting a clear message from the federal government this week: Keep taxes on legal marijuana sales consistently low across Canada, or risk undercutting the government's goal of ending black market cannabis sales.

But provincial governments may find that enticing consumers to buy legal marijuana over illicit weed will take more than just tweaking tax rates. The question of how provinces allow marijuana to be sold could also play an important role in pricing.

Legal medical marijuana sold by Health Canada-licensed firms in June cost an average of $9.34 per gram before taxes, according to Brad Martin of CannStandard, which tracks the cost of legal cannabis. The Health Canada regime allows registered clients to make online or telephone orders, which are then delivered by mail.

A 2016 analysis by the Parliamentary Budget Office estimated that black market dried marijuana sold from 2015 to 2016 cost between $8.32 per gram (weighted regionally) and $9.36 per gram (weighted by purchase quantity). Of course, black market purchases don't include taxes on top.

Mail-order sales one option for provinces

Some licensed marijuana producers have argued that provinces should stick to the current e-commerce system used for medical marijuana when legal recreational marijuana sales are launched in 2018.

"That way the costs remain very close to what they are right now," said Colette Rivet, who represents a number of licensed marijuana producers as executive director of the Cannabis Canada Association.

Producers like the idea of expanding a system that's already in place.

"The advantage of the mail-order system is, it can be done on day one and it can be done with confidence," said Cam Battley, executive vice president of Aurora Cannabis, an Alberta-based licensed producer.

'The mail-order model would probably provide the lowest cost to the consumer, but it's very much uncertain as to whether the provincial governments will permit that'  - Neil Maruoka, analyst, Canaccord Genuity

Rivet said maintaining mail-order sales would also let provincial governments collect local sales data, which could eventually help them decide where to locate retail stores based on demand.

Although Rivet said she expects retail marijuana storefronts to be an option "eventually," she suggested that the costs of running brick-and-mortar stores could result in increased prices for consumers.

Analysts Matt Bottomley and Neil Maruoka of Canaccord Genuity expect the current mail-order system to evolve into a wholesale distribution model once legalization takes place. As licensed producers transition from direct-to-consumer sales to wholesale sales, their profit margins on sales of dried marijuana will be squeezed, wrote the analysts.

"The mail-order model would probably provide the lowest cost to the consumer, but it's very much uncertain as to whether the provincial governments will permit that, given that from what we've heard they've been more focused on bringing some sort of retail distribution into the whole process," Maruoka told CBC News.

Who gets retail sales?

Existing marijuana dispensaries are vying with pharmacies and liquor stores to be allowed to sell retail cannabis in Canadian provinces.

Allowing retail dispensaries to compete with one another would be the best way to let market forces put downward pressure on prices, said Rosy Mondin, who represents dispensaries and other businesses as executive director of the Cannabis Trade Alliance of Canada.

'It should be up to individual producers and retailers to be able to...establish prices'  - Rosy Mondin, Cannabis Trade Alliance of Canada

"It should be up to individual producers and retailers to be able to...establish prices, and if the prices are too high and people aren't buying, they're not going to make it," said Mondin.

Some dispensary advocates argue against a government-controlled retail system.

"Setting up a Crown-owned distribution system and forcing union retail employees will add overhead that will drive pricing upwards and hurt the competitiveness of legal retailers," wrote Jeremy Jacob, president of the Canadian Association of Medical Marijuana Dispensaries, in an email.

In Ontario and Manitoba, public employee unions have argued that provincial liquor stores staffed by their employees would be the best option for sales. In B.C., the union that represents public liquor store employees teamed up with private liquor stores to promote the idea.

Marijuana dispensary

Retail marijuana dispensaries have proven popular in some legal U.S. jurisdictions. (Richard Vogel/Associated Press)

It could make financial sense for some provinces to take advantage of that existing liquor distribution infrastructure in order to reduce the costs of setting up sales, said Barinder Rasode, CEO of the National Institute for Cannabis Health and Education.

"But if you're going to have to create a whole new model, that's going to cost extra money," she said.

The CEO of the Neighbourhood Pharmacy Association of Canada said his group is only interested in retail sales to medical users. Justin Bates called for medical cannabis sales to be tax-free, and expressed hopes for increased coverage of the drug under benefit plans.

"We believe that there's concerns if you're adding a tax to the cost for patients to access the medication," said Bates.

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