Cannabis retail association predicts 15 per cent of private retail shops will close within next 6 months

Paul Taylor waited two years and spent tens of thousands of dollars for a licence to legally sell recreational cannabis at his small, boutique dispensary in Vancouver. Despite the upfront costs and overhead, Taylor thought it was worth it.

At 58 years old, he saw it as his ticket to eventual retirement.

"I thought 'this is going to be great. In time, I'll be able to retire and enjoy this business and as it turns out, I've had to double the hours I'm working just to stay afloat," he said.

Recreational marijuana has been legal in Canada for almost four years, yet in B.C., many retailers are still finding it difficult to make ends meet. Private retailers, like Taylor, allege unfair pricing from the public government-owned dispensaries is pushing owners out of the market by offering products with slim margins compared to wholesale costs.

CBC News reviewed the prices of dozens of products which showed margins ranging from 25 per cent to seven per cent. There were also other products with higher margins.

"They're selling products at such a low price, we just can't compete with that as a mom and pop shop," said Taylor.

"Ultimately, we will go under eventually."

Retailers say that B.C. Cannabis Stores [BCCS] are offering razor-thin, unsustainable margins. However, BCCS says it is operating according to business standards while also staying competitive with the illicit market.

In B.C., there are 33 public government cannabis stores and over 400 private shops.

Retailers at-risk of closing

Jaclynn Pehota, the executive director of the Association of Canadian Cannabis Retailers [ACCRES], which represents private retailers with more than 50 brands in B.C., says the heavily discounted prices aren't only affecting private stores in the Lower Mainland.

"I've heard this from my retailers in Nanaimo, in Vancouver, in Kamloops. Across the province, it is a very significant challenge to private licence holders."

She says the issue becomes immediately apparent as soon as a new BCCS opens near established private stores.

Ehren Richardson, the co-owner of Sunrise Cannabis on Kingsway in Vancouver, says he instantly began to lose business when a public store opened up the street. That, in and of itself, he says, wasn't surprising, until he saw the prices at BCCS.

"We realized that they are offering products at prices we couldn't even touch because you wouldn't be in business if you matched those prices," said Richardson.

Richardson welcomes competition, but he worries that once the majority of private retailers are priced out of the market and public stores own the market share, prices could rise. And he's concerned that B.C.'s cannabis industry will lose many of its legacy operators who advocated and helped pave the way for legalization.

"If we really want the lowest prices and the best values, then there should be an equal playing field between all the competitors in the retail cannabis space including the government," said Richardson.

Pehota predicts that, within the next six months, 15 per cent of private retail shops will close in B.C. due to a lack of profitability.

Competing with the black market

It's unclear how BCCS can offer such low prices and whether the stores are profitable or, as Richardson suspects, they are being subsidized through tax revenue. B.C.'s Ministry of Finance says the Liquor Distribution Branch [LDB] does not publish the profitability of individual stores.

"LDB only shares wholesale cannabis data but does not release sales data for retail and online stores because it is considered competitive information," said the ministry in a statement.

For the fiscal year of 2020/2021, the cannabis division of the LDB's net income before head office expenses was $13.6 million, according to the annual report, but no further breakdown was provided.

Public Safety Minister Mike Farnworth says a fluctuation in pricing is normal in business but B.C. Cannabis Stores are not being subsidized with tax revenue.

In a statement, the LDB says BCCS tries to maintain minimum margins between 23-25 per cent for all preroll and flower products. Products sold below that, it says, are being priced down to clear inventory or are products with poor sales.

However, it admits it is also competing with a thriving black market.

"BCCS is required to balance its need to be profitable with staying competitive with the illicit market, which it has been mandated to eliminate," it said.

Competitive vs predatory pricing

Both Taylor and Richardson allege the LDB is engaging in predatory pricing. But Thomas Ross, UBC professor of regulation and competition policy, says businesses are often quick to call foul when competitors are simply being competitive.

The difference is intent.

Predatory pricing involves one firm setting purposely low prices with the object of driving rivals out of the business and then raising the prices.

"This is to be distinguished from normal good tough competitive pricing where sometimes firms price low because that's where they think the market is," said Ross.

"Their competitors might not feel happy about it, but if that's where their optimal pricing is then we wouldn't view that as predatory."

Richardson has filed a complaint with the Competition Bureau, an independent Canadian agency tasked with keeping markets competitive.