Ontario government’s marijuana monopoly could weed out craft growers

TORONTO — Ontario’s plan to sell and distribute recreational pot exclusively through a network of government-operated stores could lock in the dominance of the country’s large-scale licensed marijuana producers and weed craft growers out of the market, industry experts said Friday.

Two of the country’s biggest producers, Aphria Inc. (TSX:APH) and Canopy Growth (TSX:WEED), cheered the province’s plan to have the Liquor Control Board of Ontario operate a network of standalone marijuana stores as well become the sole online recreational seller. They also welcomed the government’s pledge to stamp out illegal dispensaries, eliminating them as potential competitors.

Aphria’s chief executive Vic Neufeld said Ontario’s plan — the first province to announce its approach — helped bring some much-needed clarity to the future landscape of the recreational marijuana market.

“Selfilshly, I’m really glad to see that the supply chain through the Ontario brick and mortar, and online, is coming from licensed producers across the country,” said Neufeld.

However, the Ontario government’s plan to become the dominant wholesale customer for recreational marijuana puts a vast amount of power in the hands of one buyer, said Cheryl Reicin, chair of the life sciences group at law firm Torys. That, in turn, will make it harder for smaller producers to compete, she said.

“It’s going to put a lot of pricing pressure on the LPs, the licensed producers… It will be interesting to see how many players they deal with,” she said.

“Whether it’s going to be a whole bunch, or whether the numbers will dwindle.”

The federal government has introduced legislation to legalize recreational marijuana by July 2018, but left it up to the provinces and territories to oversee distribution and sales.

Ontario is the first province out of the gate with a detailed plan to sell and distribute recreational marijuana when Ottawa legalizes it next summer.

Ontario Finance Minister Charles Sousa said the Liberal government has not made any decisions yet on pricing and taxation, as these issue will be discussed in a meeting with the provinces, territories and federal government this fall. It will sell marijuana in as many as 150 dedicated stores by 2020, but will start with 40 in July of next year.

The process of purchasing recreational cannabis will be very similar to the one in place for alcohol at the LCBO, with a minimum age of 19, Attorney General Yasir Naqvi.

But the government’s plan to start with only 40 stores in July 2018, when recreational pot is set to be legalized federally, drew criticism for not providing enough access and spurring marijuana users toward illicit sellers.

Jacob Capital Management analyst Khurram Malik says limiting the amount of Ontario residents that have easy access to legal pot will make it harder for the government to shut down the black market and cap the potential for legitimate providers.

Canopy Growth President Mark Zekulin said it will take some time for the government’s distribution model to scale up, but it and other producers which already sell online can help serve those who don’t have an outlet nearby.

However, having fewer independent retailers may hamper smaller marijuana producers in the same way that craft brewers are at a disadvantage at the LCBO, said Dan Sutton, the founder of B.C.-based marijuana producer Tantalus Labs.

“It’s feasible that smaller producers will experience more pressure in an environment with less independent retailers.”

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