HEXO’s Bold Move Takes Aim At Cannabis Black Market

The #1 problem for Canada’s cannabis industry to date has been easy to identify: not nearly enough cannabis stores opened by Canadian provinces. That problem is starting to abate as most provinces are now reaching a critical mass of cannabis retail stores.

Retail sales are now consistently rising monthly at a double-digit rate. But this leads to the second problem facing the Canadian cannabis industry (and all legal cannabis industries): the cannabis black market that still dominates overall consumption and sales.

Canada’s government has explicitly cited “ending the black market” as one of its top priorities (and reasons) for legalization. Yet it has done nothing to help the legal cannabis industry achieve this goal.

One cannabis company – HEXO Corp (US:HEXO / CAN:HEXO) – has seized the initiative here.
 

The greatest hurdle for the (taxed and regulated) legal cannabis industry in displacing the cannabis black market is price. HEXO’s announcement signals real progress in leveling the playing field.

Statistics Canada recently reported that the average price for (legal) cannabis in Canada dipped – for the first time – to CAD$10.23. But with black market cannabis at ~$6 per gram, this has still provided cannabis consumers with a significant incentive to buy from the black market. Until “Original Stash”.

The Canadian government created this black market with nearly a century of misguided cannabis Prohibition. But when it comes to unwinding the black market, this same government is clueless.
 

• It over-regulates the legal cannabis industry
• It over-taxes the legal cannabis industry
• It hides the legal cannabis industry from view with absurd advertising restrictions

Black market cannabis operations don’t face all this extraneous overhead. If the Canadian government was serious about putting an end to the cannabis black market, it would seek to streamline the legal industry – to promote efficiency.

The government would either provide industry-friendly regulations that promoted scale and efficiency. Or, it would provide a low-tax framework for the legal industry (at least over the short term) to directly make the legal cannabis industry more competitive.

Canada’s government has done neither. Now the private sector is leading the way.

“Our aim with Original Stash is to disrupt the illicit market, educate consumers about the value of a regulated and tested product, and drive them to purchase their cannabis legally,” added [HEXO’s CEO, Sebastien] St-Louis. “We’re now competing directly with the illicit market and providing consumers with an affordable, controlled, quality product. Moreover, we are giving consumers the option of less packaging in a 1 oz format, which we know is a priority for so many.”

Bold. Progressive.

HEXO’s Original Stash accomplishes its stated objective. It provides legal cannabis to consumers at a price that undercuts black market prices.

HEXO is to be applauded for its initiative in displacing black market cannabis commerce. But HEXO has a luxury that most other Canadian LP’s don’t enjoy. With its dominant position in the Quebec cannabis market (Canada’s second largest provincial market), HEXO has sufficient scale in its operations to be able to bring a low-cost product to market.

Other Canadian LP’s have less economies of scale in their operations – and less capacity to dramatically reduce wholesale/retail prices. The private sector cannot succeed in phasing out the black market without some tangible government support.

It starts with making the legal cannabis industry more visible to Canadian consumers.

Cannabis isn’t an extremely lethal consumer product like tobacco (which kills over 480,000 Americans per year). Or a moderately lethal consumer product like alcohol (which kills over 88,000 Americans per year).

Cannabis is safe. Non-toxic and non-addictive. Yet listen to the rhetoric from Canada’s ill-informed cannabis Czar, Bill Blair.

“It’s not the government’s intention to promote the use of this drug but rather to make it legally available in a well-regulated manner to reduce the social and health harms often associated with cannabis use.” [emphasis mine]

First of all, the government should be “promoting” cannabis, as a much, much safer alternative to either alcohol or tobacco use. It could net Canada’s provinces billions of dollars in healthcare savings alone.

Second, there are no “social and health harms often associated with cannabis use.” There is just decades of anti-cannabis propaganda, produced by our governments (and Big Pharma) and distributed by the mainstream media.

Fake News. All discredited by real science.

In the real world, legalizing cannabis makes cities (and their populations) healthier.

The government needs to relax its cannabis advertising restrictions, particularly in adult settings, and allow the legal cannabis industry to reach consumers the free-market way: via advertising.

This is the one advantage that government can bestow upon the legal cannabis industry that cannot be matched by the black market. It would be a sign that “ending the black market” for cannabis was a real government commitment, not just lip-service.

Along with less-restrictive advertising, the government also needs to ease taxes (for both cannabis companies and consumers) and streamline regulations to reduce overhead and expedite cannabis licensing.

The cannabis black market is a government-created problem. Solving the problem requires proactive government policies – not a cannabis-phobic legal framework that undercuts the legal industry. Better cannabis regulation is imperative.

In the meantime, HEXO is leading the way in Canada in the quest to phase out the cannabis black market.