Liquor boards take note: Race to the bottom will crush craft cannabis growers

Discussion in 'Canadian Patients' started by gb123, May 16, 2018.


    gb123 Well-Known Member

    Liquor distribution boards across Canada have been tasked with a lofty mandate when it comes to cannabis—capture market share from one of the most entrenched unregulated cannabis markets on the planet, and do it fast. Their collective first instinct follows understandable logic: buy cannabis for a low wholesale price, and sell it for a retail price that the vast network of illicit growers across this nation cannot compete with. This strategy will substantially benefit high volume producers of commodity grade crops, while crippling the competitiveness of small scale growers.

    The cost burden of compliance to the Access to Cannabis for Medical Purposes Regulations (ACMPR), tax, and extreme distribution margin expectations make undercutting the illicit market an unwinnable fight, especially for small regulated growers. Challenging the illicit market solely on cost will also inhibit market diversity along the way. Simply put, if the only differentiator is lower prices, it is a war that cannot be won.

    Licensed producers underreport costs
    Firstly, the British Columbia Liquor Distribution Board (BCLDB) in particular suggest they have transparency on production costs of publicly traded producers that we know, that we rely on, as we work through our supply agreements and our pricing models. These public disclosures alone are not an accurate benchmark, for a few reasons. Even the large licensed producers (LPs) who claim they can grow for $2 per gram cannot actually sustain a business selling at that price.

    LPs carry substantial costs not associated with illicit production, and their desire to appear competitive to shareholders incentivizes them to downplay these burdens. In the interest of fostering demand for their shares on the public markets, LPs use accounting methods that pull costs such as tax, packaging, lab testing, security operations, quality assurance, sterilization, pest control, management, human resources, technology, e-commerce, finance, marketing, legal, accounting, design, community outreach, public relations, government relations, investor relations, product education, amortization, depreciation, and administration out of their reported cost-per-gram.

    The lower an LPs cost per gram appears in public disclosures, the more competitive an LP appears to their shareholders (and moreover prospective shareholders). Any financial professional who has studied the ACMPR can attest to the reality that cost accounting is subjective at best, and blatantly underreported in many cases.

    “Cheap” does not sell
    The largest market cap companies in the ACMPR also enjoy substantial economies of scale. What can hypothetically be produced for an all-in cost of $3 per gram at 500,000 square feet of production space might cost $7 per gram at a canopy of 5,000 square feet. Small regulated growers are likely even smaller than this, and their participation is essential for a diverse and inclusive marketplace.

    Producing low-cost cannabis is an exercise in simplifying logistics. Large greenhouses, monocrop genetic homogeneity, fast vegetative and flowering cycles, and fast drying cycles are strategies that enable producers to maximize harvest volume. These strategies are the only way to drive agricultural costs to their lowest breakeven point.

    Optimizing a cultivation environment for production volume is, however, inherently an exercise in cutting corners on quality. Over-dried, physically stunted, and single-strain harvests deter discerning users regardless of low prices. Looking at analog markets, the argument can be made that such mass-produced product has a difficult time selling at any price, no matter how low.

    Regulated markets prefer quality
    The core problem with a production strategy that maximizes volume is that it simply does not yield consistently saleable cannabis. In Washington state, low-cost cannabis produced at high volume struggles to sell at any price. It often languishes in retailers and is then resold below production cost as inputs to derivative extraction. Many firms have failed at this strategy in the three short years of legal cannabis sales in the state.

    On the other hand, scarce, exotic, and delicately finished craft cannabis flies off of shelves at substantial price premiums. Prices often above $15 USD per gram represent a premium customers have been demonstrably happy to pay for the convenience, supply chain transparency, mandated purity, and farm-to-table culture of their purchases. Market trends overwhelmingly favor cannabis differentiated on quality than price.

    The race to the bottom: Everyone loses
    Finally, the cost burden of ACMPR compliance is substantial. About 90 percent of LP applicants will fail before they sell a gram of cannabis. Factor in tax, massive distributor margin expectations, and retailer margin, and inevitably the cost of legal cannabis from small regulated producers will be higher than that of the illicit market. Even if a stable and competitive regulated marketplace can create the efficiency to move retail cost below $10 per gram, illicit producers will still be happy to perpetuate the race to the bottom well below this threshold.

    The fact is that producers with facilities below 100,000 square feet will struggle to build a sustainable business at a $4 per gram wholesale price. It is worth noting that such a production facility costs no less than $10 million to build and operate for the duration of the ACMPR licensing process as it stands today.

    If small producers are crushed under the margin expectations of monopoly distribution, the lack of diverse quality products on retail shelves may very well push customers and producers alike back to illicit grow-ops. A distribution system that facilitates quality, diversity, and inclusion of small growers is the only way to avoid such an eventuality, and that system simply cannot exist at a $4 per gram wholesale price.

    gb123 Well-Known Member

    "LPs carry substantial costs not associated with illicit production,"

    ya..its called greed ya bunch of mofos..
    and yer gonna find out the hard way just how badly you've all gone and FUCKED UP :) :-P

    Novabudd, VIANARCHRIS, WHATFG and 4 others like this.

    gb123 Well-Known Member

    "mass-produced product has a difficult time selling at any price, no matter how low." :weed:

    Ill take all the cheap shit off yer hands as long as its not sprayed....

    gb123 Well-Known Member

    WOW with this line of thinking :-? its right back to the BM for anyone who wants to make it in the industry!! ;)
    R.Raider likes this.
    The Hippy

    The Hippy Well-Known Member

    Nice article and pretty smart writing imo. Yes Yes and more Yes.
    We are so gonna fuck trudys ass bloody and all his greed bag buddies.
    And they all SO deserve it too. They deserve if for fucking decent folks over since the 60's. They deserve it for not apologizing!
    This will be trudys biggest disaster in the long run. And he and his scank father deserve it.
    Along with every other prime minister in between who didn't give a fuck who the unjust cannabis laws screwed over.
    Now these same filthy DRUNKEN pricks figure it's get rich quick time. Oh ya.....well karma's here baby and you bastards are gonna get what you deserve. Bankruptcy. hahahahahahaha...fuckin loosers.
    We tolda so.

    gb123 Well-Known Member

    boom baby:cool:

    HotKarl2 Well-Known Member

    Since all three other parties except the Liberals in ON have said they want to dismantle the provincial governments monopoly on weed retail and allow independent operators, I will vote anyone but Liberals. Wynne is going to regret that she tried to STEAL the peoples plant!

    gb123 Well-Known Member

    Wynne is going to regret who she is

    zoic Well-Known Member

    Wynne is a puppet, someone else is pulling the strings. It does not matter who is put in office, the puppet master(s) will be pulling their strings also. I am sure that some white supremacist is running the show, like always.
    GrowRock and Kul like this.

    bigmanc Well-Known Member

    I feel I would do just fine at 3-3.50

    Somatek Well-Known Member

    That's not accurate;
    -the NDP support the lib model but criticise the lack of stores & would open more. They accuse PC of being irresponsible for pushing an unregulated market.

    (can't find it on their site anymore but I can forward my correspondence with them about this topic to you, they're language is the same as the libs)

    -the PC don't have an official platform. Ford has said both that he would license independent retailers & also that it's an issue he'd have to look at very closely & carefully.

    -Greens are the only party to openly support a free market approach to both distribution & craft growers. They explicitly talk about the value craft growers would add to the economy/community, compare them to craft brewery/winery.


    I'm still undecided, PC need to sort out the allegations around the 407 & without a police investigation to clear them I don't think I can vote for a party already embroiled in corruption scandals. Libs are obviously out. NDP have the same attitude as the libs as far as I can tell "we know what Ontario wants & needs, so we don't need to engage in debate". Greens seem overly idealistic & not based in reality.
    TheRealDman likes this.
    redi jedi

    redi jedi Well-Known Member

    Yep situation normal...dry or lubed are the only options

    Somatek Well-Known Member

    Pretty much, you can't expect much from a broken system that rewards dirty politics. Which is why moving to an unorganised township is getting more & more appealing.
    GrowRock, TheRealDman and gb123 like this.

    OLD MOTHER SATIVA Well-Known Member

    likeher..i am sure some snowflake pc entity is running the show
    greg nr

    greg nr Well-Known Member

    Yeah, I still don't get it.

    In my state, investing in either a legal grow op or a legal retail outlet/dispensary is fool's money.

    LP's need a profit margin. Their costs are very high. Their product is taxed. Logistics expenses are incredibly high. Regulations can be crippling. They have a perishable product where supply will far exceed demand. Competition can sell at a fraction of the cost, and legal homegrowers can cut it even lower for themselves.

    Driving the price an LP can charge down will only make that worse.

    So here is the problem they are trying to solve. Medical dispecsaries are currently charging ~ $15/gm; they still aren't profitable even after 4 years. When retail comes online, that will probably have to be $20/gm.

    The independent market is charging $5-$7 a gm, and that is falling. You can grow it at home legally for about $0.50/gm. So how low do they need LP's to go before they can compete with the independents on price?

    It's the old story of you are losing money on every sale, so you decide to make up for it by selling in volume.
    CalyxCrusher and gb123 like this.

    gb123 Well-Known Member

    feds will pay them when they

    Flash63 Well-Known Member

    Kathleen Wynne..

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