Hitting the cannabis black market to cut down on legal sales

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The illegal cannabis market continues to thrive today – even in states that have legalized adult cannabis. With more states working to introduce new recreational cannabis programs this year and others expected to legally approve adult cannabis, it is important to consider what is happening in the illegal markets in states where cannabis- Programs used for adults.

While there are several reasons the black market is still doing so well, some cannabis companies are starting to fight back with more effective product positioning in Canadian markets, and US brands should be careful.

The lesson we need to learn is that branding and product positioning will be critical to success in the U.S. cannabis market in the near future – just as it is in other industries.

How Canadian cannabis companies are fighting the black market with product positioning

According to a study by Headset, the low-cost segment of the cannabis market in Canada (i.e. products with a retail price of $ 6 or less per brand) accounted for 40% of all dried flower sales in July 2020, up from 10% in September 2019. ‘

New, cheaper cannabis products in the “value” segment are aimed at people who are currently shopping on the black market in order to lure them into the legal adult market. Once customers move into the legal leisure market, the goal is to sell them on higher priced products.

Aurora Cannabis Inc. and Canopy Growth Corp. have launched low-priced products in Canada over the past few months to break into the black market and increase sales. In fact, Canopy Growth plans to become the leader in value products in the recreational market, which CEO David Klein expects to grow to about 50% of the total adult-use market.

It seems that efforts in Canada to move sales to the legal market are starting to work. In the second quarter of 2020, legal cannabis sales in Canada exceeded illegal sales for the first time.

Specifically, Statistics Canada reported that recreational cannabis spending reached $ 648 million during that period (up 74% over the same period in 2019) and medicinal cannabis spending was at $ 155 million (unchanged as of December 31, 2019) same period in 2019). Compared with illegal sales in the second quarter of 2020, which hit a new low of $ 784 million, sales of legal cannabis for medicinal purposes and for adults accounted for 50.5% of the market.

Fast forward to June 2020 and Statistics Canada reported that the legal cannabis industry was responsible for a contribution of $ 5.44 billion to Canada’s gross domestic product (GDP), compared to $ 3.89 billion for the black market.

According to BNN Bloomberg, the Cannabis Council of Canada believes the move away from the black market is mainly due to the fact that legal cannabis is being sold at more competitive prices.

What is happening on the US cannabis black market?

While the black market problem is widespread in the US, the problem is significantly larger in some states than others. California is a perfect example.

In its draft 2019 annual report, the Cannabis Advisory Committee warned California lawmaker and Governor Gavin Newsom that a combination of high taxes, strict regulations, and local prohibitions allows the black market for cannabis to “consume up to 80% of the cannabis market in California.” dominate. ”

What does 80% of the California cannabis market mean? Here is some data from the Cannabis Advisory Committee report to provide perspective:

  • Illegal sales are three times higher than legal sales: In 2019, legal cannabis sales in California were expected to be $ 3.1 billion, compared with $ 8.7 billion in illegal sales.
  • The tax revenue is around a third of what the state expected: The passage of Proposition 64 legalizing adult cannabis projected annual tax revenues of $ 1 billion. However, in the fiscal year ended June 2019, only $ 288 million in taxes was collected. The estimated tax collection for the coming fiscal year is only $ 359 million.

California isn’t the only state with a black market problem. Illegal sales in Massachusetts make up 70% of the market, as does more than 50% of cannabis sales in Washington and Oregon.

In other words, despite the fact that legal cannabis products should be safer and of higher quality than illegal products, a large number of consumers in the United States still choose to buy on the black market than through licensed companies.

5 factors that make the US black market thrive

Many proponents of the cannabis industry cite taxes, local regulations, licensing delays (and caps), lack of law enforcement, and tough government regulations as some of the main reasons illicit cannabis sales continue to thrive. Let’s take a closer look at each one.

1. Taxes

When states and municipalities add onerous taxes to businesses across the supply chain and consumers, it creates a trickle-down effect that leads to higher prices for consumers. For many consumers, especially those with previous experience of buying cannabis from illegal sellers, the price difference is too big to ignore. Instead of paying inordinately to shop at legal pharmacies and retailers, consumers prefer to buy on the black market.

This is an issue the National Cannabis Industry Association (NCIA) is closely monitoring as New York moves closer to legalizing recreational cannabis through legislation. Governor Andrew Cuomo is pushing for an adult legalization plan in 2021 with hopes of using tax revenue to help offset the state’s $ 4 billion budget deficit. However, the NCIA has worked with the state to ensure taxes aren’t so prohibitive that they encourage more people to shop on the black market.

2. Local regulations

When local communities ban cannabis companies, it is more difficult for consumers to buy cannabis products. As a result, it is easier for consumers to shop with illegal sellers. Why travel to buy when a consumer can buy more conveniently and spend less money on the black market?

3. Licensing Delays and Limitations

Many states’ cannabis laws limit the number of business licenses that can be issued. When there aren’t enough licenses to conveniently serve customers, many turn to the black market. In addition, many states have not issued licenses in a timely manner. As a result, consumer demand is not met and illicit sales continue to thrive.

4. Lack of law enforcement

Many industry professionals argue that a lack of law enforcement agencies is at least partially responsible for the flourishing illegal cannabis sales across the country, both in unlicensed store fronts and unlicensed growers.

Other types of illegal cannabis activity that must be fully combated are counterfeit products and advertising fraud. For example, counterfeiters are actively selling counterfeit cannabis products in illicit stores and online, and black market vendors know how to circumvent advertising laws in order to run their ads on the internet.

5. Government regulations

Government regulations can make it extremely difficult for companies to enter the legal cannabis industry. From high application and license fees and exorbitant taxes to massive capital expenditures and overly burdensome compliance requirements (including testing, tracking, and more), being part of the legal cannabis industry can be overly expensive and challenging. As a result, many people are choosing to continue operating in the black market and using the legal market as a shield.

Key insights into the cannabis black market affect legal sales

Until taxes (and prices) are cut, regulations relaxed, and consumer accessibility improved, the black market for cannabis in the United States will continue to flourish.

However, legal cannabis companies can make their products more competitive against the illegal market by carving out their own niches through effective branding. Product positioning is already showing some success in the Canadian cannabis market when it comes to attracting sales from the black market.

Originally published on 1/21/20. Updated on 02/12/21.

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