SMITHS FALLS, ONTARIO—The launch of the recreational cannabis industry in Canada will be a volatile ride, but the companies forming the industry seem prepared.
Bruce Linton, the co-chief executive of Canopy Growth Corp. CGC, -6.82% WEED, -6.85% braved a roughly five-hour flight from the tiny town of Smiths Falls to Newfoundland on Tuesday night, despite 60-mph winds creating enough turbulence to make landing treacherous, just to sell one of the first grams of legal weed in an outpost in the Atlantic time zone. The media opportunity was so much of a risk, he and fellow CEO Mark Zekulin decided that only Linton would make the voyage.
On the other side, though, Linton was able to officially mark the end of one era and the beginning of another: After nearly a century of prohibition, Canada became only the second country in the world, and the only member of the G-7, to legalize the drug for recreational use. Marijuana is officially legal in Canada.
The turbulence won’t end with Linton’s flight. With little history or precedent for Canada to follow, the early months of recreational cannabis sales face ambitious timelines set by the governing party, a different set of laws in each of the country’s 10 provinces, and potential supply shortages as Canada’s federally licensed producers expand production. Canopy executives, as well as colleagues at Aphria Inc. APHQF, -5.99% APH, -6.08% and Aurora Cannabis Inc. ACBFF, -7.45% ACB, -7.23% and outside experts, told MarketWatch in interviews this week that they expected significant shortages on day one of legalization.
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The pot producers have been frantically building out operations since the legislation passed earlier this year, as their stocks have drawn interest from well beyond Canadian borders for the chance that they could have an early toehold in an eventual global industry. Companies like Tilray Inc. TLRY, -4.38% and Cronos Group Inc. CRON, -1.87% have listed on U.S. trading exchanges as everyone prepares to see what the market will actually look like.
Canada offers a ripe market to test a legal cannabis industry: Mackie Research analyst Greg McLeish estimates that about 19% of Canadians consume cannabis in one form or another, much higher then the 4% average world-wide, according to the United Nations. CIBC estimates by 2020, the country will consume C$6.5 billion in revenue, or about 810,000 kilograms of pot annually.
There are more than 120 federally licensed producers in Canada, and to hear executives at those companies tell it, each one has a special blend of plant genetics, brand smarts, production efficiency and reach to make stockholders rich and rivals envious. The companies behind those swollen market caps will now have to prove their pitches by showing they can adapt, as investors wait to determine the winners.
“We are all experiencing supply chain issues for a myriad of reasons, some controllable and some not,” said Vic Neufeld, CEO of Aphria, which had to dispose of 14,000 pot plants last quarter because there wasn’t enough staff to harvest the buds when they ripened.
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There are also a shortage of retail locations. In the country’s most populous province, Ontario, there are no bricks-and-mortar stores open on Wednesday, and won’t be for months. After a new government took power in a recent election, Ontario opted to sell pot online via a government-run store and allow private companies to open up stores on the ground. In Quebec, the second most populous province, there will only be a handful of stores around the two major cities, Montreal and Quebec City.
“There will be a severe supply issue,” Mackie analyst McLeish said.
McLeish calculated that it will take 16.6 days to satisfy customer demand in Quebec, assuming the 12 stores open on Oct. 17 remain doing business for 12 hours a day following legalization. In Ontario, 500 stores would take 14.8 days to meet demand under the same conditions, according to his projections.
“The system won’t be perfect out of the gate, and we shouldn’t expect it to be,” Aurora Chief Corporate Officer Cam Battley said. “It’s a nationwide, very complex system with 13 jurisdictions, plus all of the municipalities. Are you kidding me? It’s going to take a while to iron out, but it’s going to be fine.”
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Canadian Minister of Border Security and Organized Crime Reduction Bill Blair told MarketWatch that although sales will be legal Wednesday, it will take months and perhaps longer to work out the inevitable issues that arise in the new system.
“It’s a process,” said Blair. “People look at the date of implementation—why isn’t everything in place that will be in place. The reality is, it will take time.”
Blair, a former police chief of Toronto, was one of the chief architects of the country’s policy on the drug. He says that the new laws are designed primarily to protect the public’s health and permanently evict the black market for pot, not as a grand experiment on cannabis use.
“You don’t want to experiment with a country,” Blair said.
Legalizing cannabis is an ambitious experiment, however. The Liberal government under the leadership of Prime Minister Justin Trudeau will permanently alter Canadian society and hopes to generate hundreds of millions of dollars in new tax revenue, thousands of jobs and potentially position Canada as a world leader in a sector that has been crawling toward legitimacy.
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If that vision is realized, it will likely be after a rough journey. Canopy co-CEO Linton, who experienced that bumpy flight, is ready to revel in this next step on “the process,” he said.
As Linton was showing off Canopy’s headquarters built inside a long-abandoned Hershey’s chocolate factory in Smiths Falls on Tuesday, he talked about the many failures Canopy has experienced developing technology, growing techniques and products that have begot its success. In Linton’s eyes, “the process” is the time for experimentation in an industry that has for nearly a century been illegal, in the hopes of innovation rivaling what Silicon Valley companies accomplished in the early years of the internet’s childhood.
“We’re willing to make more mistakes than any other cannabis company,” Linton said. “For a while.”
