Legal Cannabis: Opportunity and Confusion

Frank Lenk

Published: 03/25/2019 09:20:01 AM EST in Frank Lenk

 Legal Cannabis: Opportunity and Confusion

This article originally appeared in the November 2018 issue of WiFi HiFi Magazine.

Incredible, but true: cannabis is now legal in Canada. The economic impact will be huge, but the cultural ramifications may be even larger.

Canada has become only the second country to legalize cannabis (after Uruguay, in 2013). With legalization expected to spread, this puts us at Ground Zero of a new global land rush. Cannabis-related businesses, large and small, are preparing to cash in.

The retail possibilities are endless, from products directly involved in the growing, storage, or consumption of cannabis, to entertainment or lifestyle items that might have a more tangential connection. But there are also impediments that need to be overcome, including legal complexities and entrenched social attitudes.

The History

Bill C-24.5 "The Cannabis Act" has made cannabis as legal as alcohol or tobacco. But most Canadians seem unable to believe it. The level of outright paranoia at the mere mention of words like ‘pot,' ‘weed' or ‘cannabis' is running higher than ever.

This cultural gridlock isn't holding back the new wave of cannabis-related companies that have grown up over the past few years. But older companies may find themselves at a disadvantage if they fail to ride the wave of opportunity.

The stigma of cannabis runs very deep. At a press event soon after legalization, I was offered a coffee. "Have you got any pot?" I jokingly countered with a smile. I expected, at worst, to elicit a nervous laugh. What I got was a frozen, deathly silence. Apparently, cannabis is still too delicate a subject even for humor.

In the wake of legalization, we've seen organizations taking ‘a firm stand' against cannabis use anywhere, any time, by any employee. Even among WiFi HiFi staff, preparation of this article raised fears of being seen as ‘pro-cannabis.'

To be sure, no substance that deeply affects the mind and body can be considered wholly ‘safe.' But despite decades of trying, no one has ever found any good reason to single out cannabis as uniquely dangerous, on biological or social grounds.

Unlike alcohol and tobacco, cannabis is not physically addictive, nor physically toxic in any serious way. Generations of illicit use have produced no obvious outbreaks of antisocial behaviour. So there's no reason to suppose we'll go far wrong, if we apply the same restrictions to cannabis as we do on our two most familiar intoxicants.

The outright criminalization of cannabis can only be seen as an historic aberration. Cannabis sativa is one of the oldest and most useful of all cultivated plants. In fact, ‘sativa' literally means ‘cultivated,' in Latin. (Cannabis indica is an Eastern relative.)

The BRNT Faro concrete handheld pipe ($50) and Briq concrete ashtray ($50) are just two of many stylish cannabis accessories that are available at retail in Canada.

Cannabis grows happily in loose, stony soil that genteel crops wouldn't be caught dead in, and can reach five or six meters tall in a single season. Harvested, it can produce an incredibly tough fiber (hemp), which can be made into excellent paper, rope, or cloth. Cannabis seeds yield a multi-purpose oil. What's left over can be turned into animal fodder, or biofuel.

Last but not least, cannabis flowers exude a resin containing a cornucopia of beneficial and/or entertaining chemicals. Various medicinal benefits of cannabis have been known for thousands of years, and are being rediscovered today.

For most of human history, banning this remarkable plant would have been unthinkable. And yet, about 100 years ago, it was illegalized all over the world.

Cannabis prohibition has long been criticized on scientific, economic, and political grounds, to no avail. The Canadian Government's own Le Dain Commission famously recommended de-criminalization of cannabis - in 1972, over 45 years ago. That advice was steadfastly ignored by a long succession of Liberal and Conservative governments.

The ineffectiveness of prohibition could hardly have been more obvious. A recent Statistics Canada report points out that the price of ‘pot' peaked in 1989, and has been declining ever since - owing to massive oversupply.

And now, after decades of delay, prohibition has been abruptly abandoned. With almost no explanation: Justin Trudeau merely referred in passing to the "failed model" of criminalization, dismissing in two words a century of persecution, incarceration, and wasted resources.

Vapium, which owns its own ISO-certified medical manufacturing facility, displayed its medical-grade cannabis accessories in the smart home section of CES earlier this year in Las Vegas, where cannabis was legalized last year.

More importantly, there has been no admission that most of the evil herb's alleged dangers were pure fake news.
In the 1920s, Canadians were told that marijuana would turn users (especially non-Caucasian immigrants) into murderers and rapists. Since the 1960s, they've been regularly informed that ‘pot' would turn their brain into something resembling a fried egg, or that it was ‘gateway drug' that would inevitably turn them into heroin addicts.

In the weeks after legalization, the barrage of dire warnings gained a renewed vigor. It's a small wonder that public perception has lagged far behind the reality of legalization.

The Economics

To understand this disconnect, we need to admit the obvious: that legalization was motivated not by some new revelation in the science, or a seismic shift in mores. It was simple economics.

For today's cash-strapped governments, cannabis legalization is a godsend. At a stroke, it converts billions in black market revenues into a profitable commodity business, subject to a new ‘vice tax' that's eagerly accepted by grateful consumers. The closest parallel in recent history would be legalization of casino gambling, which Ontario Premier Bob Rae, to his credit, admitted to be a purely fiscal decision.

The math is compelling. Statistics Canada estimates that Canadians consumed $5.7 billion worth of cannabis in 2017, and exported another $1.2 billion. Assuming no legal export market, and no surge in domestic demand, the new 10% tax (paid by producers) should raise around $600 million per year (evenly split between federal and provincial governments).

This initial tax rate has undoubtedly been low-balled, both to make it palatable, and to ensure complete eradication of the entrenched black market. It would be contrary to all historical precedent if the rate didn't steadily inch upwards with each new budget.

A 2015 report from the Non-Smoker' Rights Association estimated that, on average, taxes constituted over 70% of the retail price paid by consumers for a carton of cigarettes. That kind of tax rate would push the annual government take on cannabis comfortably into the billions.

The $180 handmade BRNT Hexagon bong, which comes in white, black, or red, is sourced from Canadian clay, is dishwasher-safe, and includes a glass down stem, two glass bowls, and a silicone seal.

That's to say nothing of the direct profits, in provinces, like Ontario and Quebec, where sales are only through government outlets. "We didn't get legalization," observes Toronto-based cannabis activist and entrepreneur Jamie McConnell. "The government just took control."

It's understandable that the government might be reluctant to draw attention to such cold calculations. So instead of any retraction of decades-old misinformation, the long-cultivated distrust of cannabis is appeased by a redoubling of ‘educational' efforts.

McConnell summarizes: "'Okay, we're going to legalize pot - but we're going to scare you all away from it.'" He calls this "Prohibition 2.0."

Despite the barrage of negativity, dropping a new $6 billion business into a stagnant economy is bound to produce significant benefits. Some of which are already apparent.

The poster child for Canada's new cannabis industry has been Canopy Growth Corp., a large-scale grower based in Smith Falls, ON. In 2016, two years before legalization, Canopy gained notoriety by becoming the first Canadian cannabis-related company to exceed a market capitalization of $1 billion.

Other growers that have pulled similarly huge investments into the medical cannabis marketplace include Aurora Cannabis, Aphria, and Tilray. But many smaller entrants have also gotten a start in products related to medical cannabis, and are now poised to cash in on legalization.

A 2016 Deloitte report, entitled Recreational Marijuana: Insights and Opportunities estimated that 22% of adult Canadians consume cannabis at least occasionally, and 7% use it on a daily basis. Deloitte calculated that cannabis sales at that time were worth about $5 billion annually (roughly confirming StatsCan reports).

Deloitte found that another 17% of the population would be willing to give legal cannabis a try, raising the potential market to about $8.7 billion per year. Adding various "ancillaries" such as security, transportation, and so on, Deloitte estimated that the "potential economic impact" could run to $23 billion - not including taxes, licensing fees, tourism, or paraphernalia sales.

Lisa Harun and Michael Trzecieski Trzecieski are co-founders and CMO and CTO of Vapium, respectively, which has been selling two brands of vaporizers for medicinal use, and has now added a third brand aimed at the recreational market.

The opportunity presented by legalization extends far beyond our borders. Canada has a solid financial sector, sits adjacent to the U.S. market, and has strong trade relationships reaching across two oceans. Legalization on a national scale puts us in the pole position in the global cannabis economy.

Multimedia financial services company The Motley Fool reports that cannabis is currently a $150 billion dollar global market, and cites a Canopy Growth prediction that the legal market could exceed $200 billion within the next 15 years.

ABC News observes that Canada's conservative image could make it a particularly potent example to other countries teetering on the brink of legalization. Early contenders include New Zealand, Mexico, the Netherlands, and Italy. (The report included input from The Associated Press' "marijuana beat team," demonstrating just how seriously this is being taken.)

True, California's legalized cannabis market is similar in size to Canada's, and less restrictive. But the U.S. remains a long way from abandoning nationwide cannabis prohibition. That leaves Canada as the ideal spawning ground for global cannabis-related enterprises.

The Motley Fool does caution that total revenue from the major Canadian growers was less than $100 million in the last quarter. Their market caps are thus running at several hundred times their respective annual sales levels, compared to a factor of about five for the most expensive technology stocks.

This suggests that cannabis is currently more of a long-term bet than a quick way to get rich.

The Contenders

Right now, we're seeing new businesses committing to cannabis for the long haul. They're joining an old guard that persisted even under prohibition.

The most obvious of the latter are the familiar ‘head shops' that have dotted low-rent retail areas in every major city. A perfect example is Hotbox, a long-time fixture of Toronto's Kensington Market area. Its tidy premises offer an extensive stock of water pipes, rolling trays, and reading material such as the perennial best-seller Grow Yer Own Stone, by Alexander Sumach, ‘THC.'

The US$80 Vapium Lite Vaporizer, designed to be discreet, displays temperature settings, provides haptic feedback, and features conduction ceramic heating and USB-C recharging.

The existence of such outlets was typical of the disconnect underpinning prohibition. Legalization seems to have brought a whole new disconnect. For example, Hotbox reports that it can no longer display ‘bongs' in the store window. The Cannabis Act prohibits display of "any package or label of a cannabis accessory" where it could be seen by a "young person."

Vapium Inc. is a good representative of newer cannabis-related contenders. The company has been selling two brands of vaporizers for medicinal use, and has now added a third line aimed at the recreational market. It recently opened its first Toronto storefront, and reports that started offering its vaporizers in October.

The Vapium Lite is a compact, affordable ($90) vaporizer aimed at consumers new to the ‘vaping' concept. Michael Trzecieski, co-founder and CTO, sees this as the Volkswagen of a new line. "We'll be launching the Porsche and the Audi next year," he promises.

Lisa Harun, Co-founder and CMO of Vapium, sees a strong potential for non-prescription use of cannabis, as a natural alternative to commercial over-the-counter painkillers. It's less clear how consumers who may have tried cannabis recreationally decades ago will respond to the new scientifically-grown product. "We need a cultural mindshift," she says. "We're not there yet."

Home Grown Kits approaches from another angle, offering growing kits and supplies for home use. Its Cannabis Home Growing Kit ($289.95) includes reusable pots, fertilizers, measuring spoons, instructions, and subscription to 24/7 online help. The Criterion Kit ($1,289.95) adds a Light Emitting Ceramic (LEC) light fixture and a growing tent with air-circulating fan.

Bill Smith, CEO, reports that Home Grown Kits already has a couple of retail partners lined up in Ontario, and is looking for more. Potential outlets would include vape stores, head shops, health food stores, and gardening centers. "We give them a very good mark up," he notes.

Home Grown Kits offers growing kits and supplies for home use, and the company already has a couple of retail partners lined up in Ontario, and is looking for more.

Home Grown Kits has also been listing its products on buy/sell sites like Kijiji, eBay, and Craigslist.

CannaRoyalty is an investment company with a focus on cannabis-related businesses. In Canada, it operates 180 Smoke, a retailer of vaping gear, which it acquired in September.

180 Smoke currently has 15 stores in the greater Toronto area (GTA) (three of them franchises), seven more elsewhere in Ontario, and several more locations in Alberta and BC. In addition, its subsidiary 420 Wellness Inc. has been approved for its first cannabis dispensary location in Calgary. Two more Alberta licenses are pending, and additional locations are planned across the country.

Afzal Hasan, President and General Counsel, explains that CannaRoyalty looks for locations between 1,000 and 2,000 square feet. These will feature not just vaporizers, but also "a vast array of e-cigarette hardware." With legalization, the company will be able to increase the presence of overtly cannabis-related items, such as bongs, rolling papers, and vaporizing gear.

Toronto-based Milkweed Collective is a smaller startup that's been operating on the medical side since 2015, and has now applied to sell its line of accessories in Ontario cannabis stores.

Milkweed's online catalog includes various handcrafted ceramic or wooden items, sourced across Canada, says Emma Baron, co-founder and Creative Director. She adds that Milkweed often approaches makers who haven't been in the cannabis-related market yet.

At the opposite end of the spectrum is Ample Organics. Starting with just two people in 2014, the company has built a cloud-based "tracking and compliance platform," and now employs over 100. Developed for the medicinal cannabis system, this software can now be used to account for every gram of legally produced cannabis.

"We're the plumbing," says John Prentice, President, CEO, and founder. He reports that Ample Organics is tracking over 75% of licensed cannabis products, even as the number of licensed growers exceeds 120.

Article Tags:  cannabis, canada, legalization, business, industry news, feature, vapid, milkweed, canopy growth


Legal Cannabis: Opportunity and Confusion

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