'The legal stuff is garbage': why Canada's cannabis black market keeps thriving

North America’s biggest companies have seen their market values lose billions, prompting comparisons to dotcom bust

Cannabis may be legal in Vancouver but visitors looking to score are likely to run into a seemingly counterintuitive suggestion: try the black market.

Recreational marijuana was legalised across Canada in October 2018. And yet on Reddit, the specialist forum website used by millions every day, many of Vancouver’s cannabis connoisseurs still swear by their underground supply.

This is one of the major issues facing North America’s marijuana companies, which experts say are in the midst of a dotcom-style market crash.

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Canada and 11 US states have legalised recreational use of the drug, and a little over a year ago companies that cultivate and sell cannabis were seen by investors as one of the hottest tickets in town. Now billions of dollars have been wiped off the market values of the industry’s largest companies.

The North American Marijuana Index, which tracks listed firms in the sector, has plummeted about 80% in the last year and is at its lowest value since 2016, before much legalisation had taken place.

The market capitalisation of Canopy Growth, the biggest firm in the sector by value, has fallen from $24bn in April last year to just over $6bn now, according to figures from the financial data firm Y Charts.

Around $2bn of that loss has come in the last week. Coronavirus fears, which have dragged down stocks across the globe, have not helped. But a large part of Canopy’s latest share price drop came after the firm was forced to admit that it was struggling in Canada.

The company announced last Wednesday that it would be closing two cultivation greenhouses in British Columbia – the western Canadian province where Vancouver is found – leading to 500 job losses. Canopy, which will be focusing on more cost-effective outdoor cultivation, also cancelled plans for a third greenhouse in Ontario.

Bosses blamed the cutbacks on Canada’s recreational market, which they said had “developed slower than anticipated”.

The consensus on Vancouver’s cannabis-focused Reddit feeds is that the legal market is struggling to attract buyers because its product is more expensive but lower in quality than the black market alternative.

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“The government’s pot is too expensive. The government doesn’t show you a picture of what you’re buying before you buy it, so you cannot be informed as a consumer. The government weed has been full of bugs, mouldy or too dry in some cases, and often takes too long to get there,” one user said.

“The legal stuff is garbage,” said another Reddit user. A third said: “Friends don’t let friends smoke government weed.”

The sentiment is not confined to the realms of Reddit. Canadian government survey results released last month found that 40% of the country’s marijuana consumers admit to having obtained the drug illegally since legalisation.

Omar Yar Khan, national cannabis sector lead at the consultancy firm Hill & Knowlton, says legal sales have fallen short of expectations for a number of reasons. Legal prices – driven up by taxes – have been a factor in helping keep the black market “as rampant as ever”, he says.

But Khan, who advises several cannabis companies on public affairs, also believes firms have suffered in Canada at the hands of regulations that restrict their ability to develop brands.

There are strict rules around advertising for cannabis companies. Khan said: “It’s very hard to draw loyal consumers away from the illicit market to a legal market when there is very little brand identity amongst the consumer groups.”

Companies have also been held back in their efforts to open stores, often by local authorities that are against cannabis being sold in their areas.

“There just aren’t enough legal licensed points of sale across the country,” Khan said. “I think in Ontario now we’re up to about 30. But there are over a thousand beverage alcohol points of sale. So if it’s not convenient for consumers to access the product through the legal system, why would they ever leave the legacy illicit market?”

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Anthony Dutton, a co-founder and former chief executive of Cannex – a US-focused marijuana firm that is listed in Canada and was recently renamed 4Front following a takeover – believes share prices in the sector have been driven down by certain firms overpromising to investors. He believes some of these companies are likely to collapse or be taken over by stronger rivals in the future.

Dutton, who remains a shareholder in 4Front and still advises the firm, likens the current woes of listed cannabis companies to the dotcom crash of the early 2000s.

“The market got ahead of itself, started to drink its own Kool-Aid, and it was a classic example of any bubble,” he said. “So what we’re seeing now, thankfully, is a lot of the companies that probably should never have been financed – and probably should never have gone public in the first place – are slowly withering on the vine and they’ll just disappear.

“Now there will be a consolidation around half a dozen strong operating companies, including 4Front, and those will be the companies that will take it into the next cycle.”

He added: “It’s just like in the dotcom boom. Oracle, Microsoft and other big companies were all around then, and they were profitable. And when the little companies began to fail, Microsoft and Oracle and the others picked up the ones they wanted, and the others they just let die.”

Kevin Sabet, the head of Smart Approaches to Marijuana – a campaign group that opposes lifting laws on the drug – says the legalisation of cannabis has been a “boon” to the black market in many areas because it means consumers are less concerned about trying the product.

Sabet, who has advised White House administrations on drug policy, also believes cannabis companies have misled their investors and politicians about the societal and financial benefits of legalisation.

“The cannabis business has been oversold to investors as a sure thing to get a great return,” he said. “I think there was a big hype over cannabis that has ended up being a reputation it could never live up to.”


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