Money-losing Cannabis NB underestimated power of black market, says professor

Governments shouldn't have assumed that longtime cannabis users would automatically start buying from legal outlets when the drug was legalized a year ago, says business professor Michael Armstrong.

"It's an industry that's been here a long time," said Armstrong, referring to the black market established by growers and dealers. 

"You've got consumers used to shopping there, presumably found products they liked, prices they liked." 

Armstrong, an associate professor in the Goodman School of Business at Brock University in St. Catharines, Ont., has been tracking the development of the cannabis market across Canada since day one of legalization.

Patrick Parent, the CEO of Cannabis NB, told a legislative committee this week that a persistent black market was mostly to blame for the Crown corporation losing $12.5 million in its first year of operation. 

He said Cannabis NB is aware of at least 50 illegal cannabis sales operations, more than double the 20 legal cannabis NB stores. Many of the illegal sellers are full retail stores operating openly or advertising online.

But Armstrong said it is up to the legal industry to now compete for those customers. 

"They're not going to automatically switch over. The black market is not going to voluntarily give up and go away."  

Product shortages in New Brunswick and across Canada were also cited as a cause of poor sales, and Armstrong said moving forward into the second year of legal sales the big issues will be product quality and pricing. 

"Those both need to be improved." 

Product shortage threw off estimates

Armstrong said he didn't put much weight on the sales projections provinces made when they launched the legal outlets, and those projections were thrown off because of the product shortage. 

"The legal industry has taken a bite," he said. "Nationally, it might be around, say, a quarter of cannabis is now sold legally. In the Atlantic provinces, it's probably a bit higher but there's still a long way to go." 

The associate professor said online sales of cannabis through the black market are high, and consumers will turn to online sources when illegal storefronts are shut down. 

As for cannabis stores on First Nations, although the federal and provincial governments says they are illegal, the communities believe they have jurisdiction on their own land, Armstrong said.

"There's no doubt it's an extra source of competition, but I think the bigger problem is the off-reserve, the black market,  whether it's the dispensary across the street or the guy down the block, who will bring it to your door if you call his cellphone number." 

This is what the legal industry has to deal with "and to do that, they need to get their price down and product quality up." 

Carrot and stick

Armstrong said legal outlets need to use the carrot-and-stick approach to get more customers. To him, the carrot is having retail outlets easily accessible to the customer.

"You've got to have the products available, which they are now that the shortages are largely gone." 

But he said the prices have to come down from $7 per gram to $5 per gram in New Brunswick to be competitive. If the provincial government plans to make changes to the way it sells cannabis, it needs to look at a lower cost structure and fewer outlets. 

Armstrong said New Brunswick should look to its neighbours in Nova Scotia and Newfoundland and Labrador and have cannabis outlets set up in already existing liquor outlets to save on costs and overhead. 

"When you have that store-within-a-store concept, you don't need nearly as much sales to cover the costs and with even moderately modest sales you can start to earn a profit."