So the Canadian Federal Budget had no cannabis reform on excise. We want to demo in real math why so many LPs are having issues and struggling. Take “quality” arguments out of it. Their is good and bad cannabis in both the legal and illicit space. We picked OCS as their pricing model is public, and they are the largest province in Canada. We picked a $125 oz just for round numbers, $4.46 a gram, so under $5.00. Remember most oz’s at OCS are around have $99 to $120. HST is included, but we will ignore that it in the calculation, but at 13% HST in Ontario, that $125 oz has $14.38 HST in that price too. We wanted to show the real gross revenue per gram an LP is getting.
To get a $125 oz retail price at OCS, the LP gets:
- Landed Cost is what the LP sells to the OCS Warehouse: $64.70 includes excise for that 28 g unit.
- In Ontario, Federal and Additional Provincial Excise will be will be $28 Excise + additional provincial 3.9% which is $1.39 – so total Excise paid is $29.39
- The LP’s gross revenue is $64.70-$29.39 = $35.32 for that oz, which is $1.26 per gram.
Remember the LP out of that $1.26 is paying the cost of growing, including nutrients, medium, power, water, and wages. Then they must process the harvested product including trimming, testing, packaging or extraction/pre-rolling, packaging material, packaging labour, the cost of excise stamps, applying the excise stamps cost money, boxes and eventual shipping costs out of that $1.26 per gram revenue.
This is up for debate, but most business models would suggest for sustainability, an LP to survive would need to be hitting $0.65 to $0.85/g in cost to hitting a sustainable production profit margin. Maybe some very efficient greenhouses, or outdoor grows can hit these targets. Most premium cannabis (AAA+) in Canada is done indoors, so for them to hit that number is pretty challenging. Remember prior to legalization, the average retail price per gram for premium cannabis was $10 a gram ++ (if not higher for AAA-AAAA). There was no taxes likely being paid by that illicit grower. Growing premium cannabis at a large scale is expensive, and even more so under a regulatory framework.
In March 2024, the Cannabis Review Committee recommended to government to change the excise duty to a flat 10% ad valorem rate, more in line with alcohol. In that current example above, the excise would change and the LP would take home closer to $2.01/gram. Perhaps doable by many LPs? Regardless, that is significantly more revenue than the LPs get now, and possibly closer to cost for most LPs.
The point of this article was to demonstrate why so many LPs are struggling (both the “bad” public ones and many “good” private/micro ones). Most successful flower LPs are exporting cannabis, because of the excessive taxes in Canada, or they have some sort of success vertical sales model with farmgate/retail stores in their provinces or large direct medical sales list allowing some additional margin and revenue.
It is disappointing that cannabis duty was ignored in the recent Canadian budget announcement. Many critics suggest the solution is allowing LPs to close and mergers and acquisitions to happen. Yeah, likely some of that is true, but the framework is still broken. Illicit/grey market have a huge advantages paying no taxes. Taxes are well beyond alcohol and tobacco, with arguably less social harm. Provinces are the gate keepers for retail sales, and many province are trying to drive prices down to compete with illicit market, while essentially forcing the LPs to sell below cost. A desperate LP trying to pay the bill will take cash where they can with a when the product has a short shelf life. The current framework has already cost millions/billons of dollars in the industry. Not all investors were millionaires remember.
A simple fair 10% ad valorem excise duty really would have slowed down the bleeding a bit, and allow the system stabilize, and perhaps save the investments and jobs of many Canadians. Also, it is time for the Provinces to take some responsibility on the success of the industry, especially in their own province. They are proving profitable, so they can offer some margin back to the producers as well.
Optimus is a medical cannabis platform, so you may be wondering why we care?
- The excise is still added to patient and HST.
- The sustainability, and diversity of the adult market ultimately give patients more options.
- Pricing of the adult recreational market is not in isolation of the medical cannabis space.
- Many of the producers and processor in Canada are in rural communities and provide valued jobs to their communities.
Ultimately, status quo is not working. Oh, and we did the numbers for the $99.99 , 28 g bag. The LP made gross revenue was $0.82/g.