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Mapping The Road Ahead For Cannabis

11/04/2019


The legalization of recreational adult-use cannabis brings opportunities and challenges to Canadian licensed producers (LPs) and retailers of both cultivated and edible cannabis products. Many factors contribute to the momentum and success of these groups and facing the issues with practical solutions head-on can help you reach your goals.

RETAIL:

ISSUE #1. Licensing: do you have what it takes for approval, including local or Indigenous government support?

SOLUTION: Based on the requirements for your local jurisdiction and MNP’s experience working with retail entrepreneurs, your application needs to be airtight. Achieve this by:

  • Creating a strong business plan – Your plan needs a detailed background and sound financial information.
  • Presenting spotless criminal record checks – It may be challenging for “grey” market operators to ensure the past doesn’t come back to haunt them, but it is possible.
  • Securing retail space requirements, while complying with zoning and bylaws – Include your physical location, any design or renovation improvements, security and human capital details.
  • Obtaining support from your local or Indigenous government – The province does not issue a licence without support from these groups.

This may sound like a lot of work, but diligently going through the process makes your application stronger and may help avoid additional iterations or unforeseen problems later on.

ISSUE #2. Time and capital requirements – be prepared.

Licensing requires significant time and capital. The approval timeline may be very long due to the sheer volume of applications the province must get through and the bottleneck this creates. If you already have physical location, this means financial capital is tied up to cover numerous costs like permits, rent, design and renovations, security, staff compensation and equipment leases. The holding of that location can be an enormous risk.

SOLUTION: Be prepared with enough capital and patience throughout the entire waiting period, however long that may be. Have a good plan, know what technology you need ahead of time – this will greatly impact you later – and hire a consultant to help. Figure out a way to integrate or recoup these costs back once you’re up and running.

EDIBLES:

Health Canada’s proposed regulations for the edibles segment of the cannabis industry came out in December. Whether you’re operating in baked goods, beverages, creams and topicals, chocolate and gummies or any other edibles segment, some key elements drive variability and need to be addressed. You need to apply for and obtain Health Canada licensing, acquire a physical location and secure the required financial capital, equipment and people to operate your venture.

It’s clear that a number of compelling opportunities and unique barriers present themselves to this side of the business.

ISSUE #1: Health Canada’s regime is both a supportive and restrictive extension of recreational cannabis legalization – there are more risks and safety issues to navigate than in other industry segments.

Those operating in edibles face numerous regulations and safety restrictions, much like food and beverage processors do. Challenges include:

  1. Requirement of the ability to test, measure and label dosages as per Health Canada’s regulations (for instance, the low per-item THC dosage limit of 10 milligrams). This supports the “go low, go slow” approach of easing edibles into the Canadian consumer market and keeping them out of the wrong hands.
  2. Per-unit input costs are lower but finished package distribution costs are higher, as consumers may purchase higher quantities.
  3. Regulations are counterintuitive from a public policy perspective because consumers may feel inclined to binge and take several doses at once.

LPs need to be cognisant of how these factors affect their product portfolio.

Consumers may get insufficient information to make decisions and understand what they’re buying because of restrictions on packaging, distribution, marketing and advertising. These restrictions impede your ability to link marketing efforts to product branding.

The end result is uninformed product iterations and additions, along with ineffective improvements to areas like dosing, strain, taste and size. Product launches may also be weakened. As government tries to protect the public, a key balance is missing to support the building of viable businesses. Overall, this scenario doesn’t allow for consumer demand or behaviour to lift the edibles industry segment and help it gain momentum.

SOLUTION: Entrepreneurs need to consider the entire supply chain and rethink how to make dosing and marketing work for them within the allowed parameters. To achieve this, create a clear strategy, including imperative safety elements, and a solid approach to achieve it.

A good strategy requires high focus on licensing, a capital deployment plan and the internal ability to execute. There is a steep learning curve to get the process right. Just because a company successfully manufactures milk chocolate does not mean it will necessarily find success with THC milk chocolate. Likewise, just because an LP grows a great product doesn’t mean they are equipped to best manage the business of that product. Strong expertise and knowledge, in all areas, are vital.

Hire creative, qualified experts to help. Think outside the box.

ISSUE #2: We’re playing on an uneven field.

Canadian businesses are held back while American competitors – unimpeded by the restrictions of the Canadian industry – are free to market to and engage with Canadian consumers, for instance, by driving traffic via websites and social media. The plain, white packaging means our LPs lack brand presence and are at a competitive disadvantage. We need to empower our industry and move the market to fulfill demand, here at home.

SOLUTION: Get your ducks in a row and get ahead of this. Manufacturing systems, IT, physical space, staff and other important pieces need to be ready and top-notch. Be prepared and be creative.

There are countless elements to consider that many applicants did not leading up to legalization. Be proactive and know what you’re doing about such things as:

  • Processing, packaging and labelling,
  • Delivering to your local government-operated warehouse,
  • Managing the process for CRA’s excise duty, and
  • Obtaining the required space, resources, human and financial capital, and reverse logistics process.

Understanding the accounting, audit, tax, financial and regulatory issues that are integral to the success of these businesses, MNP has become an industry leader. Learn more about what MNP can do for you by contacting our team.