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Ontario's Besting Of Illicit Market Prices May Indicate A Long-Term Market Change

October 11, 2020 1:10 pm
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The Canadian cannabis market is celebrating a recent stretch of successful results. The country's adult use market saw sales reach a record CA$231 million in July, driving the market value to almost CA$2.8 billion.

July also saw Ontario's government-controlled online dispensary, Ontario Cannabis Store, report that it had gotten dried flower prices below the illicit market during the first quarter.

The CA$7.05 average per gram price includes tax and is said to best the unlicensed market's reported CA$7.98 cost. Data was gathered using Weedmaps and illicit market pricing information.

Focus Must Go Beyond Pricing
The price drop is just one concern the market must address to compete against the illicit space adequately.

"Ontario is getting close to the illicit market price point," said Clint Sharples, CEO of Heritage Cannabis Holdings Corp. (CSE:CANN). "However, the government as a whole needs to take a more holistic view of the cannabis industry in Canada."

Taxes, mark ups and fees are making the illicit market a robust and profitable place to be, Sharples added.

Hello Cannabis chief operating officer Ryan Caruso also feels that price is just one aspect the legal space has to contend with.

"The price dropping down to meet the illicit market levels is an amazing thing and a significant moment, but there's still a perceived issue of quality that we have to overcome [versus] the illicit market," he said. "Plain and simple, the legal market still [has] to put forth much better products in order to fully take over."

Product quality is also a concern.

Geoff Hoover, CEO of Thrive Cannabis, believes the legal market is on its way to addressing three key areas it must manage: pricing, quality and retail access.

"Pricing is right-sizing, quality is really starting to improve across all categories and density of retail stores makes the consumer purchase easy," said Hoover. "If those three factors continue on in this direction, we see tremendous growth for the cannabis business nationwide."

The pricing milestone is a sign of a long-term win for the market, he explained.

"I see us really living in a world where the legal market owns the majority of share within five to eight years," he added.

Replicating The Success
Ontario's recent gains can be replicated in other areas and brands will expand when the time is right, Hoover said.

"As supply comes online, LP's will be hungry to spread their wings into multiple markets which speaks to quality and pricing," he added, citing how Thrive would be in provinces if they continue to encourage the retail market expansion.

Christian Borys, managing director at Toronto-based cannabis marketing agency Black Hawk Digital, agreed.

"It's only a matter of time before the legal market fully takes over," he said. "And it'll happen faster if the government turns the corner and begins to really promote the industry by doing things like allowing operators to deliver again as well as relaxing marketing restrictions so that companies can pitch their value proposition to customers in a much better way like alcohol companies are allowed to."

What's Next For Canadian Cannabis Prices
Ontario's recent success is sure to trigger a response from illicit operators.

"They have a huge business to protect, and to think they won't defend and fight for their market share would be naive," said Hoover, adding that the legal market will win out thanks to retail expansion.

"Once store density improves, purchasing cannabis from a known, trusted and convenient source will be the only way to market," he predicted.

Heritage's Sharples warns that the illegal market will become more aggressive if it feels threatened and that the legal space could struggle as it has no counter to illicit market price reductions

"Margins for legal producers are already being squeezed, they can't go much lower," said Sharples.

Related links:
Ontario Cannabis Store Trims Prices To Combat Illegal Market
Anticipating The Impacts On Canada's Market Under Cannabis 2.0

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