Calgary·Analysis

How much for the weed? That's the big question facing Alberta's newest industry

If your idea of buying weed is going to a dealer's apartment and shelling out for whatever is on hand, a new reality is fast approaching.

With legalization looming, finding the right price is vital for consumers, retailers and government

AGLC got a feel for illicit cannabis prices from third-party researchers who canvassed users over the internet on how much they were paying for weed. (Juan Mabromata/AFP/Getty Images)

If your idea of buying weed is going to a dealer's apartment and shelling out for whatever is on hand, a new reality is fast approaching.

Canadians will soon be able breeze into meticulous, brightly lit outlets that have more in common with Apple stores and wine shops than the dingy, old head shops of yesteryear .

But as legalization nears, there's a key question still hanging out there: What's the price?

For this new industry, the answer is important — and not just for consumers.

It's significant for retailers and government, which are searching for price points that are profitable but also competitive with an established rival.

"Part of the objective is to be kind of enticing for people to come from the illicit market to the regulated market," said Kaleigh Miller, spokesperson for Alberta Gaming, Liquor and Cannabis (AGLC). "So with that in mind we want to make sure that we're priced accordingly."

Simply stated, but that's no small task.

The interior of one of Edmonton's three Fire & Flower cannabis stores that will be open for business on Oct. 17. The company has plans to add stores in Calgary. (Supplied)

Finding the right number

Imagine if prohibition was just ending for alcohol. What would a bottle of wine, beer or vodka be worth?

This fall, Albertans will have the option to buy six different categories of cannabis products, with a wide range of qualities, from more than a dozen licensed producers.

All told, AGLC's wholesale catalogue has priced more than 300 barcoded items.

As the government regulator, it buys that product in bulk from licensed producers. The goods are then sold wholesale to brick-and-mortar retailers that set their own prices in licensed stores.

AGLC will also sell to online shoppers at retail prices, which it has not released.

But before taking on the clandestine market, the government first had to get a feel for what they'd be up against — and you don't find the going rate for cannabis at the grocery store.

Not yet, anyway.

Black market prices have been trending downwards in recent years, according to Statistics Canada. In Alberta, prices in 2017 averaged around $7.67 a gram, down from $10.27 in 2012. (Darryl Dyck/Canadian Press)

So researchers got the lowdown by canvassing the illicit trade. They did so by soliciting cannabis users over the Internet, asking them to disclose what they were paying for weed.

The AGLC then added it to other data to help reach agreements with its licensed producers.

"Our prices are based off of a model that was derived from third-party research into the illicit market, combined with the price that our licensed producers would require for production," Miller said.

"The combination of the two, we feel, is a fair representation of the current market to offer to our retailers for this new industry."

Statistics Canada has been surveying cannabis prices for months, asking cannabis consumers across the country to volunteer what they're spending.

And what they found sets out some of the challenges for the new industry.

An opening price

Prices have been largely trending downward, according to Statistics Canada, which crowdsources their data from medical and non-medical consumers.

In Alberta, prices in 2017 averaged around $7.67 a gram, down from $10.27 in 2012.

In new data released Thursday, the average price for a gram of dried cannabis on the Prairies dropped to $7.17 in the third quarter of 2018, down from $7.29 in the second quarter.

The average national price, however, ticked upwards to $7.20.

Last year, Canada's finance ministers agreed on a plan to keep prices low to drive out the illegal black market and move to a legal, regulated one. (Tijana Martin/Canadian Press)

What does this mean to consumers? What will retail prices be?

Last year, Canada's finance ministers agreed on a plan to keep prices low to drive out the illegal market and move to a legal, regulated one.

At that time, the expectation was legal weed would be priced around $10 a gram, taxes included. Analysts still anticipate prices will open around that mark across Canada this fall.

Brad Poulos, an expert in the cannabis industry and a lecturer at the Ted Rogers School of Management at Ryerson University, expects cannabis to range in price from $6 to $18 a gram depending on the product, quality and content.

"A good, weighted average is somewhere in that [range of] maybe $8 to $10," he said.

"In provinces where cannabis is a little more scarce and prices are a little higher in the illicit market pre-October 17, the government may be able to squeeze a little higher price."

But there's also some speculation that weed prices could soon climb if demand quickly burns through current stockpiles of legal cannabis.

An economist with the C.D. Howe Institute, a public policy think-tank, told CBC News there's not currently enough legal supply of cannabis to meet all the recreational demand in Canada.

A McMaster University study suggested the ideal price range for consumers — the price where they'd buy legal weed instead of turning to the black market — was $10 to $12 a gram. (Thomas Samson/AFP/Getty Images)

That concern is echoed by Khurram Malik, head of research at Jacob Capital in Toronto and co-founder of cannabis company Biome Grow, who said it's taken too long to license producers.

If prices do go up, the question will be how much government steps in, Malik said.

"That'll depend on how much pricing control the provinces put and exert on [licensed producers]," he said. "I think they will try to keep it at that $10 level artificially until there's enough supply to meet demand, which I don't think is going to happen until [the second quarter] of 2020."

Selling an experience

So what is the right sales price? That's something many cannabis retailers are still working on.

From a policy perspective, a McMaster University study suggested recently that the sweet spot for consumers — the price where they'd buy legal weed instead of turning to the black market — was $10 to $12 a gram.

The study's author said that, at lower prices, people tend to prefer the legal option.

Nick Kuzyk, chief strategy officer at High Tide Ventures, which plans to open more than 10 licensed stores in the province by Christmas, said it may take some time for cannabis prices to settle.

He said that will depend on wholesale prices, inventory and demand.

"Then it's going to be a function of what customers are willing to pay and what they're interested in," Kuzyk said.

“We're making history here in this country,” said Nadia Vattovaz, Fire & Flower’s executive vice president of finance. (Supplied)

But retailers aren't only competing on price; they're selling an experience. And business owners aren't hoping to attract only current cannabis consumers, but big numbers of new ones.

Take Flower & Fire, which will have three Edmonton stores open for business on Oct. 17.

Their stores look clean, bright and airy — there's not a cannabis flag in sight. They'll be staffed by "cannistas" who'll help customers navigate all their options. It's designed to be comfortable.  

"We're making history here in this country," said Nadia Vattovaz, Fire & Flower's executive vice president of finance. "And we want to establish ourselves as strong members of the community and to educate the public on what responsible cannabis retailing looks like."

Dealers not done

Regardless of what retailers do, the illicit market isn't expected to quickly disappear.

Indeed, one Calgary cannabis dealer, who spoke on condition of confidentiality because of the potential legal consequences, doesn't believe the new market will syphon away his customers.

"There will be more dealers entering the illicit market on a smaller scale because of home-grow rules," he said. "There will be a huge illicit market for concentrates and edibles."

He said the illicit market will compete by undercutting prices and creating new cannabis strains.

Malik doesn't think Canada's black market is going away anytime soon, either. Still, he believes that will change as the legal cannabis industry matures over the coming years.

"We'll have a cheaper product, a higher quality product, with better depth and breadth because we're going to be able to spend the money on new things that the black market won't be able to compete with."