Cannabis wholesale chaos didn’t ‘meaningfully impact’ Canada’s market – or did it?

Crippling service disruptions at two of Canada’s biggest government-run cannabis wholesalers in August do not appear to have meaningfully impacted the broader market, interim data for the month suggests.

Nationwide cannabis retail sales in August rose an estimated 16% year-over-year, according to data from analytics firm Hifyre.

The data was cited in a research note by Toronto-based BMO Capital Markets analyst Tamy Chen, who wrote that August’s estimated sales were in line with BMO’s outlook.

“It does not appear that industry sales in August were meaningfully impacted by the cyberattack on Ontario’s cannabis distributor or the labor strike at B.C.’s liquor board distribution center,” according to Chen’s note.

However, some industry insiders say the evident top-line growth doesn’t paint a full picture of potential sales had there been no disruptions.

Nor does it account for consumers who returned – some permanently – to the illicit market or stores that could close for good in the coming months because of unreliable wholesalers.

In British Columbia, dozens of regulated cannabis stores were forced to close their doors in mid-August after workers at the province’s monopoly distributor went on strike, leaving many stores with too little inventory. Operations didn’t resume until Aug. 31.

Also that month, Ontario’s provincial monopoly wholesaler suspended all deliveries to retailers after a cyberattack struck the parent company that operates its distribution center. Full deliveries didn’t resume until weeks later.

The two provinces account for more than half the legal cannabis sales in Canada.

A spokesperson for the Ontario Cannabis Store said the wholesaler is in the process of understanding the impacts that the service disruption might have caused.

“We are committed to improving our capabilities and processes to better meet the needs of retailers, licensed producers, and consumers,” Daffyd Roderick, the OCS’ senior director of communications, said in a statement provided to MJBizDaily.

“Over the past year, OCS completed a thorough vendor management review, hired additional staff to support vendor management, and provided training for existing staff on vendor oversight. This supports our growth, continuous improvement, and goal of enabling a vibrant marketplace.”

The OCS’ counterpart in British Columbia, the Liquor Distribution Branch (LDB), said it has not started to study the full impacts of the closure of its distribution center, including job losses and lost revenue to the province and stores.

An LDB spokesperson told MJBizDaily that the organization’s “focus has been on expediting the resumption of services,” which has included running overtime shifts at the distribution centre and working with carriers and industry partners to allocate more resources to deliver orders.

“We are aware of the impacts the service disruption has had on wholesale customers and will continue to take steps to return to normal service levels as soon as possible,” the spokesperson said.

Illicit market wins 

Jaclynn Pehota, executive director of Association of Canadian Cannabis Retailers (ACCRES), estimated that about 50 stores in British Columbia closed or curtailed hours because of the wholesale backlog, affecting about 400 jobs.

She suggested that, had the strike lasted two more days, almost three-quarters of the province’s privately owned stores could have closed their doors.

“We were 48 hours away from the vast majority of legal weed in B.C. shutting down,” she told MJBizDaily in a phone interview.

British Columbia operates a dual system in which 441 privately owned regulated stores compete against almost three dozen government-owned ones. Illicit sellers also remain prolific in the province.

Pehota said it might not be clear for months how many consumers the legal industry lost to the illicit market.

“How do you quantify that impact?” she asked about lost future sales.

“This is a sector, especially in British Columbia, that is competing desperately for market share (with the illicit market), and we just bled who knows how many consumers back,” Pehota said.

“There are people who have never bought illicit cannabis before. They were 18 in 2017, and cannabis has always been legal for them.

“This is the first time they’re saying, ‘Wait a minute, you mean if I can’t get vapes in the legal system, I can go and buy them from some guy online?’”

August usually a ‘banger month’

August is typically one of the best sales months of the year for cannabis stores, making it the worst month for a wholesale system failure.

In 2019, cannabis sales increased more than 18% from July to August.

In August 2020, they grew 6%. Last year, the monthly raise from July was 4%.

Pehota said some ACCRES members were on track for their best month ever for August, but now they’re looking at “a sizable budget hole” because they ran out of their most popular products.

“The premise that August was on track to be a banger month (before the job action) is a sound one, because I’ve heard over and over again that ‘this would have been the best month ever if this hadn’t happened’,” she said.

Janeen Davis, vice president of sales at Joint Venture Craft Cannabis, based in Salmon Arm, British Columbia, said the business was expecting August “to be a monster month.”

She said the impact on smaller businesses won’t be truly felt for some time, possibly even into the winter when those businesses typically have to get by with lower seasonal revenue.

“I don’t think we’re going to see the impact from the loss of revenue right now. I think we’re going to see them with small craft producers and independent retailers come December/January,” Davis said.

The wholesale logjam in Ontario and B.C. “may have only lasted a couple weeks, but in our highest velocity sales month of the year, the flow to our operations is going to hurt, because we’re all running so lean during the winter months.”

“The loss of revenue in August is tremendous,” she added.

Staff retention could also end up costing more for stores that were forced to close.

“Another knockdown effect could be higher-priced staff,” Pehota said.

“What’s the cost of acquiring new staff these days? It’s huge. Those folks didn’t wait around for the retailers to reopen. They went and got new jobs.”

‘Everyone else suffers’

Michaela Freedman, an international marijuana business consultant and founder of Toronto-based MF Cannabis Consulting, said federally licensed producers and provincially regulated stores are at the mercy of the Ontario Cannabis Store.

“When the OCS fails to do its job, everyone else suffers,” she said.

“Producers are sitting on packaged product that can’t be resold, and retailers are forced to lay off workers just to stay afloat.

“In an industry where consumer loyalty is so difficult to maintain, interruptions like this can be a death sentence.”

Freedman suggested Ontario – the largest cannabis market in Canada by sales – would be better off with decentralized wholesalers.

“Adopting the Saskatchewan model (of privately owned businesses) is not feasible for a province with more than 1,300 stores,” she said, “because it would make independent retailers more vulnerable to price compression and lead to even more logistical errors.”

Source: https://mjbizdaily.com/how-canadian-wholesale-cannabis-issues-have-impacted-the-market/