The proposals below are designed to supplement (and at times compete with) the LDB’s role in cannabis distribution, and could be adopted individually or in combination with each each other.

Each policy reform would introduce private supply chains and greater market mechanisms into BC’s distribution and retail model, but could co-exist alongside the current framework of LDB distribution and public/private mix of retail stores.

The reforms are offered with a number of goals in mind: to encourage growers into the legal market and give producers the maximum chance to succeed, to reduce the incentives for black market use, to shore up cannabis supply, drive tourism, and support a diverse and sustainable cannabis industry which reflects the true spirit and history of BC.

Farm Gate Sales

The introduction of ‘farm gate’ or direct sales would allow LPs to offer on-site sales of product at their facility.

Similar to tasting rooms at brew pubs and wineries throughout the province, consumers would be able to visit LPs to see where their cannabis was cultivated and processed, and engage with staff directly onsite who could provide information and advice about the products on offer.

So far there is only one example of cannabis farm gate sales in the whole of Canada - a Tweed store in St John’s, Newfoundland - while Ontario’s retail model will restrict LPs to operating a single retail store at their production facility only.

Crucially, farm gate sales could be introduced for BC LPs without the need for growers to enter large supply agreements with the LDB. This would be of particular benefit for micro-licence holders with limited output, and could reduce costs and complexity for the LDB.

The model for farm gate sales could be similar to that of brewpubs, where an accountancy workaround allows producers to sell and repurchase product from the LDB without it leaving the facility.
The LDB could then chose to apply the 15% cannabis wholesale markup to farm gate sales, maintaining revenues and an even playing field, or waive the tax to support local production and community tourism.

Benefits

A farm gate model would uniquely benefit BC growers, and could help encourage new legal operations in the province. It would also provide a valuable source of income for smaller craft cultivators and help them to establish a local community base, while allowing LPs to directly capture retail profits.

Farm gate sales would help LPs to forge a direct relationship with consumers, enhancing consumer education while capturing valuable information on customer preferences and feedback. In providing a memorable experience, it also highlights a craft, community approach to cultivation, allowing brand identity and loyalty to be built while encouraging a responsible and engaged approach to cannabis use.

Farm gate sales could also form the cornerstone of a vibrant, BC-style canna-tourism, as well as generating positive knock-on benefits for local businesses such as restaurants and hotels. With the province’s wineries attracting one million visitors a year, there is legitimate scope for craft cannabis tourism to flourish as its own industry, and could be introduced as part of a broader BC-wide development strategy.

Drawbacks

Farm gate sales are not a panacea, however. They are likely to represent only a small proportion of sales for most LPs, and of the BC market in total. And absent of a wider tourism drive, farm gate sales will serve a relatively small population of local consumers only.

Crucially, establishing farm gate sales will also require the support of local municipalities, many of which may be opposed to the idea and who would have the ability to veto applications. Farm gate sales may also increase the regulatory burden on the LDB, who will need to ensure that rules on packaging and quality testing are adhered to onsite.

Finally, farm gate sales represent a form of vertical integration - which some deem controversial - and may open calls for off-site vertical integration in the future.

LP to Consumer Online Sales

Under this model, BC residents would be permitted to purchase cannabis online directly from the websites of Licensed Producers.

The system would represent an near-identical extension of the existing medical online model, where customers register online directly with LPs while verifying their age and identity, with additional ID verification required upon delivery.

A number of model variations are possible, with online sales permitted to BC residents from all LPs across Canada, or limited to LPs situated in BC only to ensure compliance.

The LDB could also ensure that the minimum retail price is applied on all online adult-use sales, and collect the equivalent revenue from the LPs.

As with farm gate sales, BC LPs could be permitted to sell direct to BC consumers without the need to enter a broader supply agreement with the LDB. This would be a particular benefit to smaller operations, who could also use online sales as evidence for market demand when negotiating supply deals with other provincial wholesalers.

Benefits

The current medical cannabis system in place is highly successful at preventing access to minors, and could be easily replicated for a recreational model. Online sales represent a low-cost model for consumers, while also allowing LPs to capture retail margins.

Against a backdrop of early shortages for legal product, online sales allow an LP to be responsive and to supply product as soon as it is available. And by smoothing supply shortages and easing consumer frustrations, it would increase incentives for consumers to use the legal market.

Online sales also allow LPs to generate a direct relationship with consumers. Companies could tailor information, offerings and suggestions to their customers, improving user experience and retention while gathering valuable data on consumer profiles, preferences and purchasing habits directly.

In addition, online sales of brands and products not stocked by the LDB would improve consumer access in remote locations and municipalities where retail stores do not operate.

Drawbacks

Given the fact that the LDB already offers online sales, direct adult-use sale may be considered an unnecessary replication by the province. It may also impose extra costs on the LDB in terms of establishing revenue collection of the provincial mark-up, as well as any additional compliance and inspection costs for monitoring private distribution.

The benefits of online sales may also be quite limited if it is permitted for BC producers only, while restriction to in-province production may create difficulties for LPs with multi-province operations or subsidiaries.

Private Retail to Consumer Online

British Columbia’s distribution restrictions could also be eased to allow private cannabis retailers to host their own online store. This would allow cannabis retail stores to operate similarly to private liquor stores, who have been permitted to sell products online and deliver to consumers since October 2016.

Saskatchewan as adopted a retail model of this kind, where a retail licence holder can establish an e-commerce platform serving the entire province, while retailers in Manitoba can also offer an online store and integrated delivery service.

Benefits

Significantly, introducing private online sales and delivery could allow for an on-demand or same-day service for local consumers, rivalling existing black market operations of this kind.

Retailers would be able to serve a geographically wider consumer base, and could offer a wider choice of products than those in store. In addition it may help encourage retail specialisation, with consumers choosing to use a retailer’s site for trusted product curation, information and recommendations.

Drawbacks

However, the model of private online sales is somewhat redundant in BC unless retailers can source products from suppliers other than the LDB. (Saskatewan lacks a provincial wholesaler completely, while Manitoba’s government wholesaler does not conduct online sales).

If product is only ordered from the LDB, this model creates an element of inefficiency, with the ‘double cost’ of warehousing and distribution at both the LDB and the retail level. In addition, it may create additional regulatory and compliance costs for the private delivery of cannabis, especially regarding any ‘on demand’ orders fulfilled by store staff or a local courier method.

LP to Private Retail Sales

Building on the concept of online private retail sales, an additional option for reform would be to permit LPs to directly broker supply agreements with private retail stores.

Such reform would eliminate the need for LPs to secure a supply agreement with the LDB in order to be stocked by private retail locations. This would be closest to a free market model of supply and demand, and reflects the supply chain structure in US states where recreational cannabis is legalized. In Saskatchewan, which does not have a provincial wholesale monopoly, LPs are free to enter supply agreements with both licensed private wholesalers and retail stores directly.

So as not to undercut the pricing of the LDB the government could impose a similar markup to private supply agreements, and develop a mechanism to collect a cut of the deal if wished. The scheme could also be restricted in various ways, including permitting B2B sales solely for BC LPs or micro-cultivators. The province could also impose limits on the volume or value of sales agreed in this way, or the number of retail stores an LP can enter into an agreement with.

Benefits

Private supply brokerage would offer a route to market for micro and craft growers with smaller batches and boutique, premium offerings which it may be inconvenient or uneconomical for the LDB to stock. In turn, this could facilitate greater experimentation, innovation, and development of niche cannabis products.

This business-to-business model would allow growers to develop direct relationships with retail stores, and facilitate brand exposure in more populated metro areas. The specialisation of stores could lead to an enhanced ‘craft experience’ for consumers, increasing the incentive to purchase through legal channels, while allowing retailers to offer ‘in-store exclusives’ which deliver them value.

In addition, elimination of a wholesale middleman can help move product quickly from where it is produced to where it is in demand, lessening delivery timelines, smoothing supply, and satisfying customers.

Under this model, LDB would free up capacity to focus on its core advantages - negotiating large, bulk orders, and the provision of adult-use cannabis to the broad consumer base at competitive prices.

Drawbacks

However, allowing LPs to negotiate directly with retailers bluntly undermines the concept of a provincial monopoly wholesaler. It may also be considered unfairly disadvantageous to government-run stores, who must then compete against private retail with a smaller range of products.

In addition it may prove overly onerous for small LPs to negotiate with individual retail stores directly, and would require a regulatory framework in place to facilitate and track the private supply agreements.

If retailers appear to have a close relationship with a particular retailer, it could also be considered a method by which to circumvent vertical integration restrictions, and seen as anti-competitive or exclusionary if only limited to BC LPs.

Vertical Integration

Under BC’s current regulations, the vertical integration of cannabis cultivation and retail is prohibited. Where there is deemed to be a ‘close association’ (financial or otherwise) between an LP and a cannabis retail business, the retailer is prohibited from selling any products from that licensed producer.

This has precedence in the alcohol industry, where ‘tied house’ rules have historically prohibited breweries from selling their own products at businesses they have a financial relationship with. However following provincial reform in 2013, small and medium-sized breweries in BC can have have tied-house relationships with up to three offsite bars and restaurants.

BC is unique in offering private cannabis retail while preventing any form of vertical integration: Alberta, Saskatchewan, Manitoba, Ontario and Newfoundland and Labrador all permit licensed producers to operate retail stores, albeit with certain restrictions.

However, the vertical integration of cannabis production and retail is considered controversial in some circles, and is prevented in Washington State and California. To prevent against undue market influence by large Licensed Producers, the province could introduce a number of safeguards, including a requirement for vertically-integrated retail to adhere to the same minimum pricing as other stores. Restrictions could also be placed on the total number of stores an LP holds within the province or a municipality, or a limit calculated from market concentration. In addition, requirements could be introduced for vertically-integrated retail outlets to stock a certain proportion of a competitor’s products.

Benefits

In some ways, vertical integration is simply an extension of farm gate sales. Particularly for smaller or more rural producers, the ability to operate a retail store could provide a valuable source of custom and exposure.

A vertically-integrated operation also allows producers to finely craft their brand experience, from cultivation to final sale. This additional control over brand identity can be particularly valuable to producers, given federal restrictions on cannabis advertising, marketing and packaging.

Similar to farm gate sales, vertical integration enables LPs to access valuable retail data and consumer preferences, which may in turn promote increased and higher-quality R&D. And it also allows producers to capture both cultivation and retail margins from their sales, increasing the profitability of their business.

Drawbacks

There is a chance that unchecked vertical integration could reduce the diversity of stores and products in the marketplace, although regulatory controls could be put in place to lessen the possibility of this. Without them, vertical integration may provide a retail advantage to larger, well-financed LPs at the expense of smaller craft growers.

There is also a chance that vertical integration would spur market consolidation, incentivising the acquisitions of smaller operations by larger businesses.

Conclusion

None of the proposals given above are a ‘cure-all’ to fix every shortcoming of the legal system.

Beyond how BC cannabis is sold, a number of issues face the entire Canadian cannabis industry - such as those of packaging, reliable supply and quality. Nurturing BC’s own industry will also require further constructive engagement with municipalities, local government and cannabis sceptics, as well as campaigning for the provision of options such as consumption lounges and cannabis event permits.

However, each one of the reforms offered here would provide new opportunities for producers, increase consumer choice and invigorate BC’s legal industry. Taken in combination, the effects could be transformational for the fledgling industry.

BC deserves to lead the provinces when it comes to cannabis entrepreneurialism and progressivism, and deserves a fluid, open model of cannabis sales which enables this.

Without a doubt, British Columbia has the skills, passion and drive to set the standard for a what a successful, responsible and fully-legal cannabis industry looks like. And as we enter the first full year of legalization, it’s time to build upon and hone the system to truly let BC shine.

Charlotte Bowyer of Hanway Associates