Canada’s Federal Government intends to legalize the recreational use of cannabis by July 1, 2018, and the market is expected to have a significant impact from coast to coast. A recent study by Deloitte, Recretional Cannabis – Insights and Opportunities, found initial cannabis sales could reach $5 billion and potentially rise to $8.7 billion.
Sales are just a fraction of the market’s potential worth. According to a recent report by Bloomberg, the market cap of just one cannabis company, Canopy Growth Corp., has already exceeded $3 billion. The same Deloitte study found the potential upside to a legalized recreational cannabis market – including things such as tourism and license fees – could be greater than $22.6 billion.
But what’s in store for Canada’s legal cannabis market and how will it function?
1. Legal doesn’t mean unregulated
The recreational use of cannabis, even when legalized, will remain tightly regulated by Health Canada and individual provinces.
There will be many restrictions on where cannabis can be purchased, who may buy it, and where it may be consumed – in much the same way alcohol and tobacco are currently regulated. New Brunswick, for example, has proposed requiring cannabis users to keep the drug in a locked container within their own homes.
Big questions remain regarding licenses, distribution permits, and even pricing.
As legalization nears and provinces debate and amend proposed cannabis legislation, users will get a clearer picture of exactly how the market will function in their jurisdiction.
2. The market will mature very quickly
During prohibition, an underground market quickly developed with countless small players brewing, distributing, and selling alcohol. However, once the recreational use of alcohol was legalized, the market changed very quickly. Macro breweries cornered the market, with craft breweries taking a long time to carve out a part of the market for themselves.
Currently, there are very low barriers to entry in the growing, soon-to-be-legal cannabis market. Mom and Pop shops are springing up in cities across the country, discreetly selling everything from indoor greenhouses to cannabis recipes. Micro-cap companies, those with a market capitalization of approximately $50-300 million, currently dominate the market but that may change.
The recreational cannabis market is likely to go through significant and immediate changes once legalized, especially if provincial and federal legislation favour the big players. Large tobacco and pharmaceutical companies, for example, may be able to enter the cannabis market very quickly, especially if cannabis sales come at the expense of sales of alcohol or tobacco.
3. Navigating the market will be tricky at first
The recreational cannabis market will have an indirect impact on most areas of Canadian society and the economy, from law enforcement and healthcare, to insurance and wealth management, to accounting and bookkeeping.
There will be new questions from and for growers applying for development permits, distributors importing or exporting cannabis, and sellers opening a business bank account or filing business taxes.
Few if any of the professionals working in these fields will have had previous experience with a legal recreational cannabis market and that’s going to cause some growing pains. It will take time for everyone from accountants to lawyers to adjust.
Over the next seven months, we will gain insight into exactly how Canada’s recreational cannabis market will look. Until then, all we say with certainty is that it is wise for all Canadians to monitor legislative developments and learn more about how the effect the market will have on them.