The big news this week has been the Liberal government’s supposed timeline for cannabis legalization, along with some details of what legalization will look like. A report from the CBC stated that legislation will be introduced the week of April 10, with legalization in effect by July 1, 2018. Legalization point man Bill Blair has since stated that July 1, 2018 is an “aspirational date”.
This puts Health Canada’s feet to the fire on the production side of the equation. No one was surprised to hear that production will be federally regulated, presumably through a beefed-up version of the licensed producer regime under the Access to Cannabis for Medical Purposes Regulation (ACMPR). But we are going to need exponential growth of existing production capacity in order to meet recreational demand. Health Canada is going to have to allocate significant new resources to process the ever-increasing number of expansion requests from licensed producers, and to finally get through the backlog of 422 ACMPR applicants still waiting for a licence.
The more interesting discussion is on the distribution and sales side. As expected, reports confirm that the retail sale of cannabis will be handled on the provincial level. Surely provinces are already knee-deep in considerations, but having a retail system operational in every province by July 1, 2018 is incredibly ambitious.
One way that the government might intend on meeting this timeframe is a phased-in approach to the sale of recreational cannabis, for example allowing initial delivery by mail only, while the storefront model works itself out across the country. In its final report, the Task Force on Cannabis Legalization and Regulation recommended including a direct-to-consumer mail-order system. The task force viewed delivery by mail as important to mobility-challenged individuals and to individuals in rural and remote communities where a physical store might not be viable. The Task Force also identified a phased-in distribution option.
Licensed producers appear to support mail delivery. This is not surprising. It permits them to sell direct to consumers at retail prices, instead of selling at wholesale prices to dispensaries (whether privately or publicly owned). It also enables licensed producers to market directly to their customers and overcome some of the obvious brand development challenges in an industry where marketing to the general public is limited.
Implementing mail delivery for recreational cannabis should be a relatively painless process. We do, after all, have three years of experience under our belts with mail delivery under the ACMPR its predecessor, the MMPR. Of course, age verification will be an important issue. The task force noted that mail delivery could “inadvertently put youth at increased risk”. Under the ACMPR, age is not an issue. Registration with a licensed producer is based on original medical documentation (aka prescription) from a physician. In the recreational stream, sales to minors will be prohibited.
We know that one of the primary objectives of legalization is to reduce access to cannabis by minors, so we can expect that any mail delivery option would include required steps to ensure that licensed producers are not selling to minors, such as requiring identification and a signature upon delivery, payment through credit cards, etc.
It’s not yet clear who would regulate a mail delivery model. The federal government does so under the ACMPR, and will continue to regulate the licensed producers. However, the task force stated that mail delivery would require “appropriate provincial and territorial oversight," and there's some uncertainty as to what that means. It would be incredibly inefficient to have licensed producers sell to provincially regulated third parties, who would then sell by mail to consumers in each province; it's likelier that any mail delivery option would be direct from licensed producer to consumer.
We are already seeing a flurry of mergers and acquisitions, with licensed producers acquiring other LPs and late-stage applicants in an attempt to blanket themselves across the country. But if mail delivery becomes the preferred path, we will likely also see a new phenomenon of distribution centres established by licensed producers, especially the big ones. The economics of distribution centres haven't made sense in a medical market, but on a recreational scale, they might. Licensed producers who can offer quick delivery times over an expansive geographic area with low delivery costs will have a competitive advantage.
Canopy Growth has just announced that it will soon launch a website which will sell cannabis produced by all three of its subsidiaries. We can expect to see further development of this model, with cannabis ‘aggregators’ – licensed producers who will buy and resell other producers’ cannabis - essentially becoming online dispensaries.
As the legal framework continues to evolve, so too will the business landscape. Stay tuned…
THIS POST IS FOR INFORMATONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.
Trina Fraser is a partner with Ottawa business law firm Brazeau Seller Law (www.brazeauseller.com). Her business law practice includes advising ACMPR industry participants on regulatory issues.