Policy Fail: Why Undercounting the Illicit Market Matters
“Reality only appears to us tragical because of the disequilibrium and confusion of its appearances.” Piet Mondrian
Stats Canada (SC) understates the size of the illicit market (IM), lessening Health Canada’s (HC) inclination to meaningfully reform tax, licensing and branding policies.
Simple math illustrates the magnitude of the problem. Forecasted 2024 Canadian rec & medical cannabis sales are ~C$5.2B. The govt optimistically estimates today’s IM at ~30% of the total market, thereby assessing the combined legal and IM sales at ~$7.4B. If one takes a more conservative IM estimate of 50% then the combined market rises to $10.4B. This is plausible. Some banking analysts have forecasted an even bigger market.
A large $2.2B - $5.2B IM revenue leakage (the difference is in the combined market denominator) hurts everyone: LPs miss out on badly needed sales while govt's forgo tax revenues and job creation.
Undercounting the IM also turns off equity investors who prefer relatively untapped, high growth markets.
Most importantly, consumers remain at risk from unregulated products.
Canada’s cannabis glass is half-full, with legalization still an incomplete project.
Here are 4 reasons why SC gets it wrong – and why nothing will improve without concerted industry advocacy.
1. SC employs outdated methodologies and studies (link below) that ignore the ‘new normal.’ Legalization has spurred higher consumption through the emergence of new segments (e.g. seniors) and categories (e.g. derivatives).
Relatively recent, broad trends (e.g., falling alcohol consumption, declining cannabis stigma) have been positive tailwinds for weed.
2. Provincial and municipal regs play a role in boosting consumption and IM sales. Retail saturation drives up consumption in some neighbourhoods. At the same time, SC’s under-counting methodologies don’t pick up high IM sales in under-stored Quebec or the retail deserts of Ontario and BC.
3. HC has little incentive to push for greater accuracy, given other priorities and the fact that their long-postponed review of the Cannabis Act is already late.
4. The governing Liberals have no reason to address the issue, especially with a pending election. In fact, a low IM allows the Liberals to trumpet the success of their Cannabis Act and place the blame for industry ills on LPs, as opposed to taking responsibility for them.
Five-plus years into legalization, it’s time to get serious. One of the Cannabis Act’s primary objectives (which incidentally was not accompanied by goals) was to aggressively combat the IM. This is not a hash pipe dream. Colorado, an older legal market was able to shrink their IM to 20%, 5 years into legalization.
Let’s align on better numbers so we can more towards a more germane policy discussion.
#regulations #healthcanada #statscanada #illicitmarket #blackmarket #LPs