The Current

2 years after legalization, cannabis producers are making too much marijuana

Two years after cannabis was legalized in Canada, an oversupply of marijuana is making it hard for producers to turn a profit. Meanwhile, cannabis retailers in Ontario say the government is eating into their sales.

Meanwhile, private retailers say the Ontario government is cutting into their sales

Workers process medical marijuana at Canopy Growth Corporation's Tweed facility in Smiths Falls, Ont., on Feb. 12, 2018. The company announced this week it is closing 5 of its facilities across the country in an effort to boost profits. (Sean Kilpatrick/Canadian Press)

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Two years after marijuana was legalized in Canada, cannabis producers are sitting on "piles and piles" of inventory that are hampering their ability to turn a profit, says a Toronto-based business reporter.

"The problem is, prior to, you know, the stores getting their licences and opening, cannabis producers were cultivating at a massive rate," said Vanmala Subramaniam, who writes for The Logic.

"Usually in a supply chain … you need about two months' worth of inventory, and now you have seven times the amount of sales," she told The Current's guest host Mark Kelley.

"You can't keep producing at this rate. And that's what the cannabis companies have been figuring out over the last year, and [they are] adjusting the operations to kind of meet this demand."

On Wednesday, cannabis company Canopy Growth announced it is closing five of its facilities and laying off about 220 employees in a bid to save up to $200 million and boost profitability. The company, which is based in Smiths Falls, Ont., will cease operations in St. John's, Fredericton, Edmonton, Bowmanville, Ont., and at an outdoor grow facility in Saskatchewan.

Despite this, cannabis stores have been popping up around the country like weeds. In Ontario, there are now close to 200 stores compared to the 50 or 60 that existed a year ago, said Subramaniam. In Alberta, cannabis stores number more than 500.

And business is good. Canada's cannabis sales increased by nearly 30 per cent between May and September of this year, according to data from Statistics Canada.

But some Ontario business owners worry the province is undermining their profitability.

Retailers don't want to compete with gov't

Under Ontario's cannabis model, the province acts as the wholesaler — picking up cannabis from licensed sellers, setting a price for the product, and then selling it to private retailers. The province also operates the government-run Ontario Cannabis Store (OCS), where it sells cannabis directly to the public.

Sasha Soeterik, a Toronto cannabis dispensary owner, said OCS served an important purpose in the early days of legalization, because it gave people a place to legally purchase marijuana.

"But now we're probably going to have 800, maybe 1,000 shops in Ontario," she said. 

"And I would say that it's probably sensible that those shops don't have to compete with the government for sales of cannabis."

In a statement to The Current, OCS said that in the last financial quarter, from July to September, 85 per cent of the $204 million in legal cannabis sales came from bricks-and-mortar retail shops.

"Stores are our partners in growing the size of the legal market, not our competition," said Daffyd Roderick, senior director of communications and social responsibility at OCS. "Our pricing model is designed to not undercut stores. All stores buy cannabis from us at a fixed markdown from prices."

Roderick added that OCS wants a "healthy and viable" network of retail stores across the province to help combat the illegal market.

"Our customer journey data indicates that and the retail stores actually complement each other, as many consumers read our [educational] articles and browse our products before going to a retail store to purchase the product," Roderick said in the statement.

Cannabis was legalized in Canada in 2018. Now, suppliers are grappling with an oversupply of the product. (Nicholas Pham/Radio-Canada)

Subramaniam agreed that there isn't a huge difference between the price of cannabis sold on the OCS website, and cannabis sold by private businesses.

However, "especially in the pandemic when our stores are shut right now," she said retailers are wondering why they must compete with OCS locations for business.

Subramaniam explained that the Alberta Gaming, Liquor and Cannabis Commission was relatively quick to hand out cannabis store licenses, and private business owners have done well as a result. Alberta began accepting applications for licences in March of 2018.

Ontario has been slower to award retail licenses, she said — and that's set Ontario cannabis retailers back as well.

"I think from the point of view of the retailers, they want to be able to negotiate directly with the licensed producers to set what they think is the right price … [and] get rid of middlemen," she said.

Written by Kirsten Fenn. Produced by Samira Mohyeddin and Joana Draghici.