Profits and perils of the new Canadian pot economy: Don Pittis

“Eyes shone, cheeks were flushed, the inner light of universal benevolence broke out on every face in happy, friendly smiles.”

That’s Aldous Huxley in his 1932 novel Brave New World, describing “soma,” a drug provided by the state to help citizens cope in his fictional dystopia.

If you are looking for something to take the sting out of the current round of gloomy news, we now know the date that recreational cannabis will become legal in Canada: Oct. 17. What comes after remains unwritten.

Brave new pot economy

Legalization is creating a whole new industry — perhaps a whole new economy. But even as pot generates new jobs and new companies and new stock market earnings, in both business and society as a whole there are plenty of potential pitfalls and many uncertainties.
Will an increase in the use of pot caused by its legalization encourage a burst of national creativity, as some studies have suggested? The results of scientific studies vary widely. As critics have warned, will legalization create a society plagued with the kind of soma-like apathy and lethargy that Huxley feared?

Medicinal marijuana user Don Appleby smokes a marijuana cigarette on Parliament Hill in 2003. Appleby has been a leader in a long battle to make pot legal. (Reuters)

Whatever the social effect, the anticipation of legal highs has certainly caused a tidal wave of business euphoria as even former conservative pot critics rush in for a piece of the action.

But Canadian pot business expert Brad Poulos says that for many, that euphoria could end in tears.

Complexity and uncertainty

“The level and the sources of complexity and uncertainty are immeasurable,” Poulos says from his Brampton home.

A journalist’s telephone call has interrupted him in the middle of his own contribution to the new pot economy. A lecturer at Ryerson University’s Ted Rogers School of Business, Poulos is preparing a program he has conceived and will lead in the autumn term offering business training for people wanting to work in the pot sector.

Poulos is excited about the flood of business activity in the field, but there are good reasons to think that among the fortunes to be made in legal weed there will also be many losers.

Christina Navarro, an analytical lab technician, works at Canopy Growth Corp in Smiths Falls, Ont., on March 8. A flood of new businesses got licences to grow cannabis, but some experts say the next wave of business innovation will be in more technical support areas. (Sean Kilpatrick/Canadian Press)

For instance, he says, early fears of a shortage of product have turned into anxiety that there may be an oversupply. According to numbers he has seen, the planned output from licensed producers could be as much as double what the market will want.

A lot depends on how Canadians react to legal pot over the long term.

Will younger people still be interested after Grandma and Grandpa are using if for bowel complaints? Will pot become a popular mainstream pastime or develop a bad reputation? Will hopes for exports and new products such as edibles, creams and pharmaceuticals materialize?

Choke-point

And in a highly regulated industry, producers and retailers may not have a free hand to maximize sales. Even in places where the private sector markets to customers, government agencies will control what Poulos describes as “the choke-point” between upstream production and downstream sales.  

He says companies and the investors who take a stake may be too optimistic about future returns.

“If you look at the prices for some of these stocks, they would imply huge amounts of profit that just don’t appear to be available in the short term,” says Poulos.

Gov. Gen. Julie Payette participates in the royal assent ceremony for the Cannabis Act and other legislation in the Senate on June 21. (Justin Tang/Canadian Press)

Of course, even things that are bad for individual investors can be good for the economy overall. Employment in the sector is surging.

And while the majority of new businesses fail within two years, the current surge of startups represents an unusual opportunity because pot is a brand new industry says Alexandra Dawson, professor of entrepreneurship and family business at Concordia University’s John Molson School of Business in Montreal.

In mature industries, she says, it is hard for a new player to go head-to-head with established players. Diageo has the Canadian market sewn up for whisky. Creating a new brand of breakfast cereal is next to impossible when the supermarket shelves are loaded with offerings from Kellogg’s and General Mills.

‘A ton of entrepreneurs’

In the pot industry, the main barrier to entry was not competition but the law, so once that barrier came down, Dawson says, “A ton of entrepreneurs can start entering.”

But according to University of Waterloo entrepreneurship professor Nada Basir, a second wave of businesses is entering the market.

“Where I think we’re going to see a lot of startup activity around this new legislation is in activities outside the traditional growth and transaction of the product,” she says.

Basir offers the example of a group of Waterloo students who developed a company, SannTek, that uses nanotechnology to measure cannabis products in the breath and bloodstream, a kind of pot breathalyzer.

And while many startups will fail, the winnowing process could give the Canadian economy a global advantage.

“Typically, historically, this is where we see innovation really happen because it becomes the survival of the fittest, and to survive you’re going to have to figure out how to scale, how you can be more efficient, how you can save costs,” she says. 

Basir says whether the individual firms succeed or fail the first time around, those entrepreneurial skills will become embedded in the whole economy, and the innovations they develop can spread far beyond the business of pot.

Perhaps the losers will find a way to soothe their sorrows.

Follow Don on Twitter @don_pittis

SOURCE: CBC.ca

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