Ontario Reduces Wholesale Markups On Marijuana As Large Operators Continue To Struggle

Canadian cannabis retailers have had a challenging year, which is why the Ontario Cannabis Store (OCS), which holds a monopoly on legal distribution in the province, announced a change in its pricing.

What Happened: Starting in September, most wholesale markups the OCS imposes on marijuana products sold to retailers will be reduced, reported CBC News. It is still uncertain what the end price tag will be for consumers.

The main challenge facing legal operators has been competition from the illicit market.

According to George Smitherman, president and chief executive of the Cannabis Council of Canada, which represents licensed producers, this is a good first step to address the situation in the market.

"There is no doubt that the reduction in markups at the Ontario Cannabis Store is beneficial to the cannabis industry," Smitherman said. "We'll be looking forward to celebrating future steps."

Why It Matters: As per OCS projections, this change should save the industry $60 million in 2024. 

In 2021-22, OCS moved $1.1 billion in wholesale cannabis, making $184 million in profits.

Many large marijuana operators had to downsize their operations, with some recently filing for bankruptcy. With this move, OCS is trying to help licensed operators.

Canadian cannabis operators that recently reported some operational challenges include:

• Aleafia Health ALEAF AH recently filed for bankruptcy. On Tuesday the company received an order from the Ontario Superior Court of Justice (Commercial List) under the Companies’ Creditors Arrangement Act, in order to restructure its business and financial affairs.

• Fire & Flower FFLWF, a weed retail chain operating across five provinces filed for CCAA bankruptcy protection in June.

• Marijuana giant Canopy Growth CGC announced in February that it planned to close its 1 Hershey Drive facility in Smiths Falls, Ontario, in addition to reducing workers by approximately 60%. Canopy recently entered into various agreements, including privately negotiated redemption agreements with certain holders of its unsecured senior notes due July 15, 2023. These agreements are expected to reduce the company's total debt by approximately $437 million over the next six months and decrease annual interest costs by approximately $20 to $30 million.

• British Columbia-based producer Tantalus Labs filed for insolvency and laid off almost all its employees. The company recently received permission from a British Columbia Supreme Court to sell over 1,200 kilograms of marijuana (its remaining stock of cannabis flower).

• Last year, one of the biggest pot companies in Canada, Aurora Cannabis ACB had multiple layoffs. 

"The scenario for a lot of companies is that they just can't find enough, after fees and taxes and markups, to be able to pay their bills and to justify what was a many, many, billions of dollars of capital investment," Smitherman added.

What’s next: A new markup rate will be 25% on most pot products, and some 23% on dried flower. At the moment, the OCS wholesale markup adds on average 31% to the landed cost of cannabis. 

Continue reading at CBC.

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Photo: Courtesy of Jeff W on Unsplash