Canadian cannabis producers and brands increasingly are, in effect, paying Ontario retailers for shelf space and other special treatment for their products, according to industry executives.

These executives allege the effective use of so-called slotting fees threatens the survival of hundreds of independently owned retailers and craft cultivators, who lack the money and resources to finance such pay-to-play schemes.

The monthly fee can amount to tens of thousands of dollars or more, according to one industry source who declined to be identified for competitive reasons.

Slotting fees, common for decades in traditional retail, are a relatively new phenomenon in cannabis in both the United States and Canada.

In Ontario, regulators prohibit producers and brands from paying retailers for favorable “material” treatment.

In June, the province’s retail regulatory agency noted that cannabis “licensees are not allowed to ask for or accept material inducements.”

Industry officials allege that, to get around such restrictions, some producers and brands are instead paying cannabis retailers for their sales data to ensure their products get special treatment in Ontario’s hotly competitive retail market.

Industry officials told MJBizDaily the workaround falls into a quasi-legal gray area, given that brands and manufacturers aren’t paying directly for prime shelf or display space or an exclusive sales deal involving their product.

It’s quasi-legal because data sales are allowed so long as the price is “fair market value.”

“It’s rampant in the industry,” Owen Allerton, owner of Highland Cannabis, an independently owned store in Kitchener, told MJBizDaily.

“Everyone knows data agreements are a smokescreen for pay-to-play, or listing fees. Multiple licensed producers have pitched us on it.”

Executives such as Allerton say the agreements involve the sale of store data detailing consumer product purchases, accessories and sometimes gift cards.

Brands and producers theoretically could use such business intelligence to gauge which products are popular – or which are duds – among cannabis consumers.

The allegations have not been proven, so MJBizDaily is not identifying specific manufacturers or brands.

Undercut competitors

Industry executives say the scheme works like this: Cannabis producers, or agencies representing them, pay stores for their consumer data.

In return, those stores hand over their data, in addition to providing preferential treatment, which might cover anything from prime shelf space, or any shelf space, to exclusivity in rare instances.

Critics say the scheme gives large producers and retail chains, which have the financial might to outmuscle smaller competitors, an advantage.

Allerton said chain stores are able to undercut smaller competitors with the help of data fee revenue.

Independent stores “can’t pay their bills if they price-match. It’s creating this crazy unfair advantage,” he said.

He suggested that 1,000-1,200 “independent” stores among Ontario’s 1,600-plus regulated marijuana retailers are at risk from the practice.

The Alcohol and Gaming Commission of Ontario (AGCO), which regulates cannabis retail in the province, “responds to information or complaints it receives, including ones related to the sale of data that is an alleged inducement,” a spokesperson for the agency told MJBizDaily via email.

“The AGCO holds all licensees to high standards of compliance.

“We will always work with licensees to help them understand and meet their regulatory obligations and will also take regulatory action as appropriate, including education, warnings, monetary penalties, and in serious cases, suspension or revocation of a license.”

What’s allowed

Earlier this year, the AGCO clarified its rules involving the sale of store data.

“Licensed retailers may enter into agreements with (licensed producers) for the sale of data for business intelligence purposes,” the AGCO stated in a June notice.

The agency added that it “expects that the fee charged by the licensee and paid for by the LP should be at fair market value.”

Some experts say the agency, in its attempt to clarify those rules, opened up a legal gray area.

“The AGCO said if you’re going to do a data program, it has to be a market ‘fair’ rate. They didn’t say what fair means, so there’s this giant gray area of interpretation for what ‘fairness’ might be for what you pay for this kind of arrangement,” Rachel Colic, a cannabis branding specialist based in Toronto, told MJBizDaily.

Colic, who co-chairs the National Cannabis Business Coalition, a national working group spearheaded by the Canadian Chamber of Commerce, also said data programs can be incredibly useful when they’re done well.

“But I think cannabis is struggling to do them well at this time,” she said.

“I think they’re being abused right now for sure, and that’s to the detriment of the entire industry. It means only the biggest, most-capitalized companies are getting a seat at the important tables.”

What’s not allowed

The AGCO’s June clarification also spelled out what would be viewed as out of bounds.

The agency said it enforces a general prohibition “on agreements for items, benefits, or services” between retailers and licensed producers.

“In other words, licensees are not allowed to ask for or accept material inducements,” according to the AGCO rules.

The ban also covers retailers, or their employees, receiving “any benefits” from a licensed producer “tied to the sales performance of any given product or brand.”

Another example of a prohibited activity includes “retailers receiving cash or cash rebates, product or product rebates, or price discounts from LPs in exchange for listing particular products at below-market prices.”

According to the AGCO, if a store or its employees are likely to change their behavior toward a cannabis producer or its product “after receiving an item, benefit or service,” then the arrangement could be considered offside.

How it works

A senior official at a medium-sized cannabis producer, who requested anonymity, explained how the data sale scheme generally works.

The official said cannabis producers will pay retailers “for the right to be in the stores” through a monthly fee for their data, based on the number of products, or SKUs, that are involved, and the number of stores where the products are sold.

From an LP standpoint, the official said, some producers have paid up to 100,000 Canadian dollars ($75,000) per month.

“The big LPs pay too much money and the small LPs can’t afford it. It’s unsustainable, because as the (large) LPs consolidate or go bankrupt, (this revenue) is going to disappear,” the person said.

“Because we don’t pay $100,000 a month, like larger LPs, (our products) get put on the sidelines,” the official said.

Small producer raises alarm

Gord Nichol, owner and master grower at North 40 Cannabis, a small cannabis producer in northeastern Saskatchewan, said he doesn’t believe most data sales are really about data.

“They’re buying up shelf space by sending money to these retailers, which has a double effect,” he said.

“It’s no longer an even playing field for the retailers or producers who don’t want to get involved in these data deals.”

Nichol said some stores have their budtenders promote products from certain companies, steering customers toward certain products.

Nichol said he has no intention of paying anyone to give his products special treatment.

“I’ve had a retail chain tell me that when my products are on their shelves, it slows down the sales of companies that are paying for shelf space, and they have to maintain those levels of sales to maintain their data sale revenue,” he said.

“I could sell twice as much product as I do if these imposed restrictions (data deals) weren’t there.”

Nichol said he doesn’t see a need for new regulations.

He said regulators should enforce the rules that already exist.

“It restricts our ability to get in front of the customers, and let the customers make the choices,” Nichol said.

“It’s the consumers that are losing out also, when these inferior products that basically don’t deserve to be on shelves, and they’re only there because of the financial intertwining of the data deals and shelf placement.

“It’s completely unfair to small producers and consumers.”

Source: https://mjbizdaily.com/ontario-canada-cannabis-execs-sound-alarm-over-alleged-pay-to-play-retail-scheme/