B.C.’s nanny state stifles rollout of legal cannabis sales

Less legal weed is being sold in B.C. than anywhere else in Canada due to apparent over-regulation that has stunted retail openings and boosted the black market

Western Investor
October 29, 2019

Canadian Cannabis Retailers
Matthew Greenwood, left, an aspiring cannabis retailer, with Jeremy Jacob, president of the Association of Canadian Cannabis Retailers, at Jacob’s Village Bloomery cannabis store in Vancouver. | Chung Chow

Despite Byzantine regulations, a robust black market, financing hurdles and wary landlords, retail sales of cannabis products in B.C. has a bright future, according to the Vancouver-based president of the Association of Canadian Cannabis Retailers (ACCRES).

“There is room for change and growth, but the future of the industry is full of potential and I am feeling very positive about the evolution of the sector,” Jeremy Jacob told Western Investor.

But, Jacob conceded, B.C. cannabis retailers face higher obstacles than in any other part of the country and it is showing up at the cash register.

B.C. has the lowest sales of legal cannabis of any province, according to Statistics Canada, and the second-lowest cannabis store density in the country. 

In July B.C. posted its highest monthly sales since legalization at $5.5 million, but this is compared with $29.6 million worth of legal cannabis sales in Ontario in the month, and is far below even much smaller provinces such as Prince Edward Island and Nova Scotia. Alberta cannabis sales in July represented $4.89 per capita, compared to $1.09 per capita in B.C., the lowest in Canada. During the first nine months of legalization, Alberta reported $145 million in legal cannabis sales, compared with $25 million in B.C.

Matthew Greenwood, a Vancouver real estate agent and would-be cannabis retailer, explains that B.C.’s strict security regulations, a sluggish approval process and problems obtaining financing makes selling marijuana legally a challenging enterprise. There is also resistance from some retail landlords who are concerned about insurance issues, the reaction from neighbouring tenants and lenders and doubts that cannabis dealers can survive long-term leases.

“I have not come across a landlord that seeks out cannabis stores,” said James Smerdon, vice-president and director of Colliers International in Vancouver, who consults on retail real estate. “[Larger] landlords with parent companies, banking ties, stocks listed, or any other ties to the U.S. or other jurisdictions where cross-border cannabis laws have not been tested are hesitant to formalize their relationship with a cannabis retailer through a lease.”

But the cool reception to cannabis retail is mostly a B.C. problem, suggests Brodie Henrichson, senior vice-president, retail, with the Vancouver office of JLL com-mercial real estate. 

Henrichson said major retail developers, such as RioCan Real Estate Investment Trust, Choice Real Estate Investment Trust and First Capital have welcomed cannabis stores in their developments in other provinces.

Edmonton-based Nova Cannabis, which has more than 30 cannabis retail outlets in Alberta, turned away from a B.C. expansion because the province has restricted single-owner outlets to just eight locations across B.C., Hutchinson said.

Nipped in the bud

The nanny-state level regulations in B.C. have nipped the cannabis industry in the bud, according to Jacob. He noted the province has already lost large B.C.-based producers, such Vancouver’s Aurora Cannabis, which opened an 800,000-square-foot plant – the largest in Canada – at Leduc, Alberta, after being rebuffed by B.C. municipalities.

Statistics Canada estimates that recreational cannabis sales in the province should constitute a $5 billion to $6 billion industry, which would rank it higher than mining, forestry and fishing combined, yet a year after legalization, B.C. legal sales average less than $3 million a month.

 “B.C. should pivot towards the economic development of the cannabis industry and away from health and safety,” he said.

Greenwood and his partners are trying to open a streetfront cannabis store on West Broadway in Vancouver, but have been waiting two months for approval, and he fears that may stretch to six months or longer. Meanwhile the group is paying $5,000 per month in rent to secure the premises and has forked out thousands of dollars more for the specialized locks and other security provisions demanded of legal pot stores.

“You need to have deep pockets,” Greenwood said. ”It makes it very difficult for a small business.”

As Jacob explained, a B.C. retailer must find a location, persuade the landlord to take a risk on them, secure financing from tentative lenders and address all the regulatory provisions, all before they secure permits. There is also a $7,500 provincial application fee. After an approval process that can take 12 months, applicants then pay $1,500 for a provincial license and, in Vancouver, $33,000 for a municipal license.

“It puts landlords at a disadvantage because they are being asked to grant a long-term lease to an applicant yet to be vetted by the province,” Jacob said.

Strata restrictions

There are also restrictions on having cannabis producers or retailers in commercial strata projects, which requires that the applicant have the support of all other strata owners in the same complex. This has effectively stymied cannabis dealers from the fast-growing strata commercial sector, Greenwood added. Other rules, such as mandatory distances from schools and playgrounds, also limit where legal cannabis can be sold.

In October, a year after recreational cannabis was legalized in Canada, only 14 stores in Vancouver had provincial licenses. Calgary, as a comparison, has 203 stores approved. 

Once open, B.C. retailers also face regulations unique in Canada, an example being that any cannabis taken from sealed containers to allow a customer to smell it must be destroyed and video taped. As well, retailers can only order product once a week, regardless of consumer demand for certain strains.

There are also consumer complaints that the government-approved weed is dried out, a result of both government stockpiling and regulations around testing for mould and other issues.

Meanwhile, B.C.’s black market appears to be thriving due to higher quality, greater selection, weak competition from legal sellers who can buy only from the province, and lower prices.

“Black-market cannabis in B.C. is about half the price of legal cannabis,” Jacob said.

Ironically for a product that emerged from a counter-culture community, corporate interests now dominate the sale of B.C. cannabis, he said.

 “The people who are expanding aggressively in retail are from other industries that are generating cash flow and are self-financed. The small business people who formed the industry and, some would say, precipitated legalization are kind of stuck in the mud.”

Jacob said that enabling B.C. retailers to buy direct from licensed producers; an easing of the federal security layers on producers and sellers that can involve the RCMP and the Canadian Security Intelligence Service; and a quicker approval process for storefronts, all changes that ACCRES is recommending, could lead to a boom of legal cannabis sales in Vancouver and the province. 

The majority of long-time cannabis consumers, however, are simply ignoring legal outlets and sticking with their traditional black-market retailers, which are well established in the province.

One user, Larry  (who asked that  his last name not be used)  said. “I can buy an eighth [3.5 grams] of primo sativa [a popular strain] for $35, which is about $20 less than at a legal dealer, and it is always fresh and local,” he said, “And there are no security cameras, and no taxes.”

Eight-location rule  

Executives at three companies representing six of the seven legal stores operating in Vancouver during the summer say their businesses still face onerous regulatory challenges. One main challenge is the province’s rule that limits cannabis retailers to eight locations, as a way to encourage small businesses.

“Having that eight-store limit in British Columbia has been incredibly difficult,” said Donnelly Group owner Jeff Donnelly, whose venture owns the Hobo Recreational Cannabis Store chain.

“We have locations that we wanted to buy development permits for in Vancouver that we had to hold off on because we were waiting to find out whether we were going to win a request in Kelowna,” he said. “The same thing happened in New Westminster.”

Donnelly’s first two B.C. stores were on Vancouver’s Granville Street and Main Street.

City Cannabis Co. CEO Krystian Wetulani similarly feels restricted by B.C.’s eight-store limit. He pointed to provinces such as Ontario, where there is a 75-store limit, and Alberta, where there is no limit on the number of cannabis stores but no operator is able to have more than 15 per cent of the stores in the province at any one time.

CEO Krystian Wetulani
City Cannabis Co. CEO Krystian Wetulani built his company before selling it to Wildflower Brands for $45 million. | Chung Chow

“To have an eight-store limit is definitely challenging,” said Wetulani. “It makes you focus more on the premium locations, making sure you’re really maximizing your eight stores.”

Muse Cannabis Store, which opened a location on Granville Street in July, is another retailer that would like to be able to have more than eight stores.

President Geoff Dear said he appreciates the government’s rationale to help small businesses but that he “would love to evolve past the eight-store limit.”

No plans to change

B.C. Minister of Public Safety and Solicitor General Mike Farnworth told Business in Vancouver that the province’s eight-store limit is staying in place for the foreseeable future, with no plans to review it until 2021. Farnworth said the rule is aimed at encouraging local ownership and preventing the market from being dominated by large players.

Cannabis activist Dana Larsen, a director with the Vancouver Dispensary Society that runs a dispensary on Thurlow Street, said the legalization rollout has been too slow and challenging for long-time operators.

“I’d be happy to shut down my dispensaries when they’re not needed anymore, when there’s a legal system that can provide our clients with the same quality and affordability and range of products,” he said. “We’re a long way from that happening.”

Larsen is one of dozens of entrepreneurs in the process of getting licensed by the provincial government, and his Thurlow store has a development permit.

“We’re not really in a hurry to get that [approval] because, ultimately, switching into the legal system is going to be a disaster for us,” he said.

“Like a lot of other dispensary operators, we’re in that system and we’re funnelling through it together to get our final permit and become legal. But really, I’d rather things stay the way they are now, because I can provide better-quality cannabis, a better range of products and a better price to my customers than I could if I became legal.”

Copyright © Western Investor

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