Canada: New LCBO Subsidiary To Control Cannabis Sales In Ontario

Last Updated: October 5 2017
Article by Randall Marusyk and Young Wang

In response to the imminent legalization of recreational use of cannabis in Canada as proposed by the Parliament in Bill C-45, the Cannabis Act, the Ontario government released a detailed plan on distribution system and usage regulations of recreational marijuana in a document titled "Ontario's Safe and Sensible Framework to Federal Cannabis Legislation" on September 8, 2017.

The centerpiece of this proposal is to create a subsidiary of the Liquor Control Board of Ontario (LCBO) to hold monopoly over cannabis retail and online sales in Ontario. This approach, as Attorney General Yasir Naqvi said, will focus on ensuring "a safe and sensible transition" to federal legalization. However, the LCBO operated subsidiary will be the single buyer of marijuana producers and the exclusive distributor to consumers. This inevitably puts it at a dominant position to make decisions on market entrance credentials, quality controls, retail prices and geographical accessibility. Private investors will not be allowed to open and operate cannabis retail stores and consumption premises in Ontario for the time being. The monopoly will also make smaller marijuana producers difficult to compete with powerhouses as Aphria Inc. (TSX: APH) and Canopy Growth (TSX: WEED), two of the country's biggest marijuana producers.

What are the key elements of the proposed framework?

  • The LCBO will establish a new subsidiary to exclusively oversee the distribution of cannabis in Ontario through retail stores physically separate from existing LCBO liquor stores and an online order service.
  • Approximately 150 retail stores will be opened by 2020, including 40 in July 1, 2018 and another 80 by July 1, 2019. The stores will run similar to tobacco sales as behind-the-counter model and there will be no self-service.
  • The locations of these retail stores will be determined in consultation with municipalities. The guideline is to target areas with illegal marijuana dispensaries to crush black market.
  • The LCBO operated website for online orders will be available by July 1, 2018. It will make recreational marijuana accessible to residents far away from retail stores.
  • Pricing and taxation decisions will come later. The anticipated profits will be modest, especially at the beginning stage with necessary infrastructure and personnel training costs.
  • The use of recreational marijuana will only be permitted in private residences. The consumption of any form of recreational cannabis in public places, workplaces or when inside a motor vehicle will be prohibited.
  • The Ontario Government will explore the feasibility and implications of introducing designated establishments where recreational cannabis could be consumed.
  • Cannabis dispensaries currently operating in Ontario are not and will not be legal retailers. These shops will be shut down through a coordinated and proactive enforcement strategy with municipalities and police forces.
  • Ontario will set the minimum age for possessing or consuming recreational cannabis at 19, same as the current alcohol restrictions. The Government of Canada in Bill C-45 proposed the age of 18. Other rules and restrictions for distribution of cannabis will be strictly in keeping with federal rules and regulations.

How will this framework affect cannabis investors, producers and consumers?

  • The safety concern is legit and marijuana should still be a tightly controlled substance after its legalization. However, the proposed monopoly model may not benefit interested parties except the Ontario government, LCBO and labour unions. This framework may deter potential investors, hamper smaller producers and drive consumers to black market.
  • Private-owned retail stores and cannabis lounges will not be allowed in Ontario according to the proposed framework. For investors, the investment opportunity is limited to marijuana production. Therefore, if some other provinces and territories present less stringent rules and regulations, Ontario would be less attractive to potential investors.
  • For marijuana producers, the monopoly model strongly favors giant corporations who have financial resources, lobbying power and business expertise to strike a supply contract with LCBO. Smaller producers may face obstacles to put their products on the shelves of legal retail stores, same as what happened to small craft brewers in Ontario under the current alcohol distribution monopoly.
  • The shut down of currentprivate-owned stores selling cannabis and business premises will make many people lose the only source of income. If the new LCBO subsidiary is not able to accommodate these people into the system, many of them may not leave cannabis business and choose to go underground. That, in return, will significantly increase the law enforcement costs and endanger the public.
  • For consumers, forty stores at the beginning stage made accessibility a big concern, especially for those who are unable to travel without assistance and having difficulty to put an online order. Furthermore, if the retail prices in legal stores are significantly higher than the black market, many consumers may simply pick the cost-effective way. It is hard for the law enforcement to tell illegal marijuana products from those purchased from legal retail stores

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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