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How the Doug Ford government lost $42 million selling pot

Doug Ford's Ontario government lost more than $40 million selling cannabis even while they were, for a time, the only legal seller in the province. Jay Rosenthal, co-founder and president of Business of Cannabis explains how it happened.
Aphria has installed sophisticated modern technology to protect its medical marijuana product. (Nicholas Pham/Radio-Canada)
Doug Ford's Ontario government lost more than $40 million dollars selling cannabis even while they were, for a time, the only legal seller in the province. Jay Rosenthal, co-founder and president of Business of Cannabis explains how it happened. 8:19

Doug Ford's Ontario government lost more than $40 million selling cannabis, even while they were, for a time, the only legal seller in the province. Jay Rosenthal, co-founder and president of Business of Cannabis explains how it happened.

Rosenthal spoke with the CBC's Conrad Collaco about how the province lost so much money in such a short time. You can read an abridged and edited version of the interview or listen to the full audio interview by hitting the play button above.

Jay Rosenthal, Co-founder and president, Business of Cannabis 
(Business of Cannabis)

How did the province lose $42 million so quickly?

I think that's a fair question and it doesn't bode well and it's not a great headline. However, there is some context.

Those numbers that came out last week, that $42 million loss, only goes to March 31, 2019. So, it really has all the startup costs baked in and none of the bricks and mortar retail numbers that started, actually, the next day on April 1st, 2019. It's got a lot of startup costs, limited online sales and then we'll actually start to see the numbers turn around this year starting April 1st as more stores came online.

At the same time, it was a rough start. If you remember last October 17th there were lots of stories about shortages on the online shelves. There was also a postal strike right as the thing started up.

So there was some significant bad news that probably got into the consumers' head. I think we actually see a lot of things baked into that $42 million. 

How does Ontario's plan compare to the rest of the country?

It depends where you're talking about but the sort of shining light is Alberta.

As of this morning there were 283 licences granted to bricks and mortar retail cannabis shops in Alberta, which is by far the largest number. By frame of reference the city of Calgary, which has one point three million people, has 57 retail cannabis stores licenced and the city of Toronto, with a population of three times that, only has five.

We're really far behind in terms of where we are for the population we represent and the numbers reflect that. I think they will reflect that in the coming year as well. Even though the province is likely to turn a profit on the cannabis file in the next fiscal.

Outside of the postal strike, which would have affected the rest of the country as well, why were we off to such a slow start in Ontario?

Mid-year last year a lot was happening.

We had a shift in government — so a political shift mid-year — a policy shift associated with that where we went from a fully LCBO model to a fully, sort of, free market private retail model here in the province plus the feds gave a fairly aggressive timeline from when the Cannabis Act was passed to when provinces needed to be up and running with some sort of sale, so you see the compression of time you see a political and policy shift all baked into expensive startup costs.

It was a rocky start. It was a quick start. There was policy and political implications. That's an expensive way to start a new business for our province. 

How successful has the Ontario model been at stamping out black market competition?

I think probably a little bit successful and we could do better.

I think there's sort of a provincial hand in this and a federal one as well. On the provincial side we need to improve more retail cannabis shops. We know that retail cannabis shops are a direct indicator of the number of people that are actually gonna go and buy legal cannabis in the retail cannabis shop.

We need more. We need to be much more on a par with Alberta than where we are in Ontario now and we're getting at that.  There's gonna be another 50 that come online sometime this year but that would bring us to 75 which is just not enough to serve the population we have in Ontario.

That's on the provincial side. And even when those shops open there needs to be differentiated products on those shelves and that is really a key factor in driving down the black market. People love the dried flower that's on their shelves now but what many people are craving is regulated edibles and beverages and vape pens and those things will come online — that's a Health Canada thing.

They'll start to come online in December and then certainly on to 2020 but until or unless we have more retail, until or unless we have many more product varieties on the shelves you're going to see a thriving black market because those are the products and those are the access points people really want.

We've seen in Colorado, where this has been going on for five years, they finally reach the $1 billion mark in tax revenue. Are we on the path to being as successful as the Colorado Model.

I think we are, for a couple of reasons, one — we have a bigger population. Two — we have a higher tax burden of on cannabis and on lots of other things. And three — we actually have the province involved in the distribution and sale of the product so we'll get there probably quicker than Colorado did but we are getting there a lot slower, certainly, in the initial phase with retail.

So I think we'll get there I think we'll probably be celebrating that no earlier than Colorado did.

But to hearken back to our Colorado started five years ago they had some of these same challenges and supply and getting stores opened and all of those things. So, this is not new to Ontario.

We're just five years afterwards and I think the country and the provinces learned a lot of what's happened in Colorado and so I think where everybody's learning as they go. Everybody that comes later learns from their predecessors.

So, we're probably on a better path than they are and will probably reach the billion dollar mark sooner than Colorado and then we can all come back and celebrate.

How does Ontario's system for pot sales need to change?

We're gonna need hundreds of more stores which sounds like a big number but Colorado has like 500 stores for a fraction of the population, so we need more stores.

We need them to be differentiated from one another because people are going to find the shops they love and people are going to find the products they love. So, it's gonna take a little bit of time for consumers to figure all those things out and for the industry to respond to what consumers want.

But, I think we're gonna get there and we're gonna get there sooner than later because I think the province is feeling the pressure from, not only losing $42 million, but the supply is picking up.

The industry is evolving. I think more and more municipalities and neighbouring retail realized that the sky is not falling when cannabis stores move in next door.

In fact, the foot traffic is a lot better. I think we're gonna have a wholly different conversation next September than we are this September where people are realizing that the shopping experience is great at many of these retailers. The products on the shelves are quality assured and what consumers want and the province will be reaping the benefits of all that.

There were many people very nervous about the legalization of cannabis. People were concerned about cannabis stores in their neighbourhood and many had social concerns. After a year, how much of a problem have those social concerns been?

Not very. To be quite honest and we'll hearken back to Colorado or California, Colorado, Washington, Oregon — the states that have been legal for some time — the sky does not fall.

The shopping experience is good. It takes a hit out of sort of some other adjacent industries be they alcohol or otherwise. But, I do think that the more that Ontarians see that this is not a boogey man.

This is something that's actually quite welcome in the community and actually beneficial and it helps drive out the black market and all of those things that we're really turning the tide in Canada first and then potentially around the world.

This is something that ought to be not only tolerated but welcomed into a society into a sort of modern environment and taking it out of the hands of the black market and put it into a regulated market. I think people will not only sort of find it net neutral but actually find it beneficial.

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