Illegal Marijuana Still Dominates in Canada After Two Legal Years

Legal pot costs more, with limited outlets, but consumers are still consuming despite COVID-19.

August 25, 2020

ALEXANDRIA, Va.—Two years ago, Canada became the first G20 country to legalize cannabis for recreational purposes, yet most customers still get their marijuana from the illicit market, Bloomberg reports.

In the fourth quarter of 2018, legal marijuana represented only 21% of total consumption in Canada, despite weed becoming legal on Oct. 17 of that year. Fast-forward to the first quarter of 2020, and cannabis is now a $1.7 billion retail industry, yet legal consumption is still just 46% of the total, according to Statistics Canada.

“Consumer conversion from the illicit market is clearly occurring, but it is still [in its] early days,” said Jesse Pytlak, analyst, Cormark Securities. “Retail infrastructure is still being developed, and useful insight on consumer preferences and behaviors is just now beginning to emerge.”

This slow growth is attributed to both steep prices in the legal market, and the limited number of physical stores, which remain few and far between in large provinces like Ontario. The accessibility of brick-and-mortar storefronts is critical for converting consumers from illegal consumption, Pytlak said.

“The pricing is still way too high relative to what we’re seeing in the illicit market,” said Matt Bottomley, analyst, Canaccord Genuity. “If you are someone that consumes cannabis on a regular interval, there’s not a lot of incentive for you to transition over.”

Legal consumption is expected to grow, especially as edibles become more popular. “Those are products that make up right now about 15% of industry sales,” Bottomley said. “If you look at any legal market, that number’s at least 50%, so there’s a lot more growth expected in these types of derivative products.”

This year’s pandemic may have dampened in-person store sales, but it didn’t necessarily hurt the overall industry. In fact, according to Bottomley, it could have even contributed to a bump in revenue for retailers.

“When COVID-19 first started in the form of people staying at home, from mid-March to April, that was actually some of the highest cannabis sales globally,” he said. “There’s still a bunch of potential consumers sitting on the sidelines.”

According to Pytlak, the pandemic has shown the sector to be stronger than expected. “The resiliency in demand for cannabis validates cannabis’ status as a recession-proof defensive industry,” he said.

Read more about the legal marijuana market in Canada in “Oh, Canada: What the U.S. can learn from Canada’s marijuana rollout” in the July issue of NACS Magazine.

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