What Happened with Cannabis Legalization in B.C.

When cannabis was legalized, B.C. was poised to profit big time from this new gold rush. Almost two years later, Douglas digs into what really happened.

The Original FARM closed its locations for the eight months it took to transition from a legacy to a legal market. The cannabis retailer now has three open locations (including Hillside, pictured here) with a fourth to open this year in Duncan. Photo by Jeffrey Bosdet

No province seemed better prepared than B.C. to step effortlessly into that bright new future when cannabis was legalized. No region was better positioned to lead the pack than Greater Victoria, where 43 vibrant and diverse dispensaries had sold B.C. bud, edibles and locally produced tinctures and oils for years.

But that wasn’t how things turned out. Two years after legalization, long-standing retailers with thriving operations and multiple storefronts have yet to return — some caught in the slow transition to legality, others raided and fined heavily by B.C.’s new Community Safety Unit.

Legal retailers in the region are scarce. Only 17 have made it through a process snarled by onerous costs and three levels of government approvals. Compassion clubs that led the 20-year fight to legalize cannabis for medical use were raided and forced to close.

Supply, quality and variety of cannabis products have all taken a hit, even while prices have increased. The black market carries on. “For B.C., it was two steps back,” says Luke Biles, Victoria-based senior manager with MNP, a business consulting firm and leader of the company’s cannabis services line for Vancouver Island. “There was no transition structure in place.

Those in what we’re calling the ‘legacy’ cannabis industry, built their livelihoods around cannabis, and, all of a sudden, it was gone. They should have been the first in line for licences, but they didn’t get a leg up. Instead they got raided, with significant fines.”

Victoria City Councillor Ben Isitt says lessons learned over decades of building a thriving and homegrown wine, beer and liquor industry in B.C. were ignored when cannabis was legalized. The new regulations rolled right over top of thousands of veteran growers, retailers, distributors and manufacturers, while publicly held companies with deep pockets moved in.

“B.C. has a very vibrant craft cannabis industry. In terms of supplying what users are looking for, growers were providing that very well,” says Isitt. “But the model Canada pursued was agri-business — the opposite direction that we’ve seen beer go. There’s a very large demand for smaller craft producers of cannabis, but governments didn’t carve out a space for them. They failed to provide an opportunity for them to transition.”

Fighting the Stigma

Blame it on misplaced fear, says Andrew McLachlan. The Victoria tech entrepreneur and founder of Canadian Micro Cannabis Consulting grew up on a cannabis farm in Saskatchewan, and is now working with Community Futures Central Kootenays to transition some of that region’s 2,000 legacy cultivators into the legal system.

“I try to look at the positives. The regulations we have now were developed by people who are ignorant of cannabis,” says McLachlan. “The people who regulated it are people who have been taught that it’s evil and bad, and they have reacted out of fear and ignorance. That’s the consequence of integrating this into all of our communities in a negative way.”

Responding to written questions from Douglas, the provincial government said “protecting health and safety” were paramount during the transition.

“While many people would have liked to see the province move faster on the retail front, we were unwilling to compromise our commitments to protecting health and safety,” wrote a media relations spokesperson with the Ministry of Public Safety & Solicitor General.

“Part of that includes fit and proper assessments—a key tool in keeping criminal activity out of a legitimate and vibrant cannabis retail industry, which is in everyone’s best interest,

as well as ensuring that Indigenous nations and local governments have a say in whether a cannabis retailer will be welcome in their community.”

Happily, most believe better days are coming. The regulatory flaws are so obvious that some are already being changed, notes Biles. B.C.’s Premier John Horgan has spoken supportively about helping the craft cannabis industry. The corporations dominating now will not necessarily be the ones leading the industry in five years, says McLachlan.

“It’s quite a mess right now, but I’m excited about it, because there are solutions out there,” he says. “We want to be empowering the craft consumers to rise up. ‘B.C. bud’ is internationally famous, and one of the first things anyone mentions about B.C., in my experience. Two of the largest market data research and investment firms in the cannabis industry are estimating that recreational cannabis will be an almost $5 billion industry in Canada within five years.”

Only Big Business Need Apply

Before legalization, B.C.’s cannabis industry was an innovative and integrated network of small businesses that grew, manufactured, distributed and sold products in diverse ways. The 2013 legalization of medical cannabis allowed growers to legally cultivate on behalf of people with medical exemptions, and some quietly cultivated for an illegal recreational market as well. The retail scene grew bolder in cities like Victoria as police put their time towards more pressing issues.

Those were good days, says Ted Smith, founder of Canada’s oldest compassion club. A veteran of the medical cannabis struggle, Smith opened his Victoria Cannabis Buyers Club on Johnson Street in 1996. The club survives, but the storefront was raided last fall and $25,000 worth of products seized, and raided again in July. Its fate is now in the hands of the federal government. “Every day is a little miracle,” says Smith.

He thinks Health Canada wanted big corporations to take the market so that there would be fewer licences to oversee. Instead, “legalization crippled the legacy market and diverted the sales of 43 dispensaries into the black market.”

The new regulations have siloed every aspect of the industry. Separate licensing processes for cultivating, processing and selling have destroyed the vertical integration that once existed at shops like Smith’s, where medical-grade edibles are made on site. Provincial governments regulate recreational cannabis while the federal government regulates medical cannabis, now available only by mail order.

Dreams of farm-gate cannabis are distant at the moment. Farmers face three distinct regulatory processes to grow, package and sell cannabis, and nobody can sell their own products directly anyway.

“We know that there is interest in farm-to-gate sales, and this is one of the options we are considering to support the development of a strong and sustainable cannabis production industry throughout B.C.,” the provincial government wrote in response to Douglas’s question on the topic.

Back to B.C. Bud

The Liquor Distribution Branch is now the sole distributor of legal recreational cannabis in B.C. That means Island-grown cannabis has to be shipped to LDB outlets in Vancouver before being shipped back to retail outlets on the Island, and has allowed an influx of cannabis from elsewhere into what was once a resolutely homegrown market.

“That affects the carbon footprint of the industry and the quality of product,” says Gavin Rose, senior cannabis consultant for the local retailer The Original FARM. That company made the painful decision to close for the eight months that it took to transition from a legacy to a legal market. (And it closed again in the initial stages of the coronavirus pandemic, but just long enough to reopen with Plexiglas barriers and social-distancing practices in place.)

“We’re now seeing cannabis being sold here that was grown in millions of square feet on the other side of Canada, and warehoused until it got to us. It’s not like the old days where the local farmer brought you in a fresh pound,” adds Rose. “I’m optimistic about the future of the industry, but in B.C. we’ve taken a large leap backwards into legalization. There’s going to have to be a lot of changes in policy.”

While the keys to the cannabis kingdom went to big corporations, Biles notes that many of them are now struggling to meet business goals. They and their investors “bought into the hype” and jumped into a market they didn’t understand. Governments didn’t understand it either, he adds, pointing to a regulatory framework that has reduced products, hurt quality and led to a rise in prices – all of which maintained the black market.

“October 17, 2018 came, and everyone was expecting to be earning revenues,” says Biles. “But the provinces were waiting for guidance from Health Canada, and the municipalities waited for the provinces. Nobody was ready. These big companies have already laid off more than 1,000 workers just since legalization.”

Like alcohol, recreational cannabis is sold at both public and private outlets in B.C., though just 16 of B.C.’s 271 licenced outlets are publicly owned. Private outlets pay 15 per cent over wholesale prices to buy cannabis from the LDB, which rankles retailers competing with government stores in their communities.

Ted Smith thinks the industry should have been decriminalized for a few years first. People would have had time to get used to a different way of doing things and gradually ease into legalization “with no harm done.” Too late now. McLachlan predicts more failures among the major cannabis companies as they learn the hard lessons of a business they aren’t familiar with.

“You’ve got supply chain experts in these companies who are coming from places like The Bay and thinking they can operate the same way for an agricultural product,” he says. “I think there will be lots of failures. Look at the tech industry for examples of that. It wasn’t Google and Facebook who were breaking ground in that industry in the early days.”

Left Out of the Conversation

In the absence of clarity on whether Canada’s regulations apply on Indigenous lands, First Nations are exploring opportunities. Smith is working with Cowichan Tribes to build a commercial cannabis kitchen on Cowichan lands to be able to continue providing medical users with specialized local products. Other bands are having those same conversations with cannabis entrepreneurs.

“Many people felt First Nations were left out of the conversation when Canada was making its regulations, so now they are doing their own thing,” says Biles. “It’s a good opportunity to see the industry develop on those lands.”

Malahat Nation is the latest Indigenous tribe to venture into the cannabis industry, opening an Indigenous Bloom Corp. outlet this April. Indigenous Bloom also has a dispensary at the Tseycum First Nation in North Saanich, as well as locations on the mainland in White Rock, Penticton, Williams Lake, Osoyoos and Oliver.

The Banking Issue

Financial institutions are still giving the industry the cold shoulder, with banks and many credit unions refusing to even allow the opening of an account. Industry observers suspect it’s because banks are wary of impacting any U.S. business, as cannabis is legal in many states but illegal nationally.

“The banking issue is huge,” says Biles. “The U.S. is working on the SAFE Banking Act for states where cannabis is legal. If that goes through, that opens up the possibility to make change here.”

Meanwhile, somebody’s going to have to figure out legal spaces where cannabis can be consumed, says Ben Isitt. The provincial government spokesperson notes that “it is a complex public policy issue,” but could be considered down the line.

“The lack of opportunity to consume in a social setting is a real problem,” says Isitt. “It’s prohibited in parks and public squares, and there’s no licensing for indoor consumption rooms. People in apartments and strata properties are facing really tight restrictions. There are obvious challenges, like air quality and worker health, to consider, but I think they’re surmountable.”

Dustin Ereiser, who owns and operates Buds Cannabis in Saanichton with his wife Megan, hopes for a loosening of advertising restrictions. Retailers can advertise only inside bars, and signage can’t be any bigger than 30- by-30 centimetres.

Initial regulations required all retail outlets to have window coverings, blocking any view of the inside of a store. That has now changed to a less stringent requirement of not having products visible. Future retailers will welcome that, but those who paid thousands of dollars to obscure their windows just months ago aren’t quite so cheery about the reversal.

Obscuring windows to shield young people from cannabis is ironic given that the majority of customers shopping at legal dispensaries are age 50 and up, says Ereiser. “The kids are all still buying black market from their buddies. It’s the professionals, the blue collars, the well- to-do who are buying legal cannabis.”

But things will settle down and loosen up soon enough, he predicts: “I liken it to liquor after Prohibition ended. I imagine when they first came out with 12 bottles in a box, people were appalled. And then the next generation comes along and knows no difference.”

McLachlan — whose cannabis app consolidates all the forms and requirements from every level of government to simplify the application process — says the immediate goal ought to be transitioning into the new system the 5,800 B.C. growers sanctioned by Health Canada under the old guidelines. “Even if you look at 10 per cent being able to transition, that’s 500 producers. That will stimulate the economy.”

Government does acknowledge the unintended consequences of legalization, says Biles. He expects fast change for some of the most pressing issues and an ultimately bright future for the industry.

“Yes, everyone has a bit of a struggle right now, but there are great people in this industry,” says Biles. “Put people from the cannabis industry together, and it’s like fireworks go off. Folks are happy to share, create new partnerships, find new ways to do business. We’re going to get there.”

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