Pubdate: Mon, 16 Dec 2019
Source: New York Times (NY)
Copyright: 2019 The New York Times Company
Author: Ian Austin


SMITHS FALLS, Ontario - When Canada became the first major
industrialized nation to legalize recreational marijuana, visions of
billions of dollars in profits inspired growers, retailers and
investors, sending the stock market soaring in a so-called green rush.

A year later, the euphoria has vanished.

"No one wants to invest in it now," said John-Kurt Pliniussen, a
professor of marketing at the Smith School of Business at Queen's
University in Kingston, Ontario.

That is because those who have invested have generally lost money.
During the first year after legalization, the value of shares in
Canada's six largest marijuana companies tumbled by an average of 56
percent, according to stock price data.

The marijuana companies say a turnaround is only a matter of time,
hoping a big step along the way will come on Dec. 16, when
marijuana-laced drinks and foods will arrive in the legal market.

But the problems that plagued the first year remain.

One is that the provincial governments in Ontario and Quebec, whose
residents account for about two-thirds of Canada's population, have
opened or licensed legal pot shops at a glacial pace - despite a clear
demand. Potential customers are still underserved with just 24 legal
marijuana shops for Ontario's 17.5 million residents. So many are
still buying on the black market.

And freed from taxation, the black market is generally cheaper across
the country.

Another problem, many in the industry say, is that the elaborate
regulatory structure for legal cannabis has been an impediment to
sales. Canada's regulations were designed only to decriminalize
marijuana use, not necessarily encourage it. The result is a system
that mimics the country's approach to tobacco, and largely blocks
marketing and advertising.

"This last year has been very painful," said Eric Kirzner, a professor
emeritus of finance at the University of Toronto's Rotman School of
Management, who compared the fate of marijuana stocks to earlier
technology share crashes. "Marijuana is hardly the technology
industry, but to me the stories are similar in the sense that we had
all kinds of hype."

Mr. Pliniussen doesn't see the opening of the market to edibles as a
turning point.

"I expect this to be just like slow ripples on a pond as opposed to a
tsunami of excitement," he said. "What we have now is what we're going
to have - this is it."

Despite the crushing business disappointments, there has been a bright
spot: Prime Minister Justin Trudeau's experiment in legalizing
cannabis has not turned Canada into a stoner nation, as was widely

Marijuana-impaired motorists are not menacing the nation's highways,
and workers are not getting high on the job. There has not even been
much change in marijuana use, except for a small rise among people
over 65, according to Statistics Canada, the government census agency.

"It kind of fell flat," said Professor Michael Amlung, a professor of
psychiatry at McMaster University in Hamilton, Ontario who studies
marijuana use. "The overwhelmingly expected response has not happened."

For the companies, the economic growing pains have been tough. Take
Canopy Growth, the biggest Canadian grower.

Canopy's business has its headquarters in Smiths Falls, Ontario, once
the home of Hershey Canada. A sprawling complex of marijuana growing
and processing rooms replaced the assembly lines that once spat out
thousands of chocolate bars and peanut butter cups each day.

These days, construction is booming at the plant, with new additions
being built on either side of the former chocolate factory. Inside,
along with the marijuana growing and processing rooms, chocolate
making is back if on a vastly smaller scale and a new added
ingredient. Across the street, technicians are doing the final tweaks
to equipment inside a brand-new, 150,000 square foot bottling and
canning plant that will soon make marijuana-infused drinks.

But during the first six months of its current fiscal year, Canopy
lost 1.6 billion Canadian dollars. Bruce Linton, the company's
founder, former chairman and chief executive who was once the
industry's de facto spokesman, was fired earlier this year.

Among its problems, Canopy struggled with converting greenhouses in
British Columbia and Quebec that once grew vegetables into ones
producing something to smoke. It built costly systems in Smiths Falls
to turn lower quality plants into oil, only to find that Canadians
overwhelming prefer to smoke the plants' dried flower buds.

And costs spiraled upward as it rushed to meet the new market's

Constellation Brands, the American company that is Canopy's largest
shareholder and also the owner of Corona beer and Robert Mondavi wine,
has cut off further investment. It will install one of its executives
in Mr. Linton's former place next month.

Canopy's shares, which hit 70 Canadian dollars during the lead up to
legalization are now down by about 66 percent.

Rade Kovacevic. Canopy's president, is still optimistic.

"It's been a very exciting ride," said Mr. Kovacevic, despite the
"short-term pain points."

He added that the "more exciting part" will come as edibles and other
products become more widely available.

"We're not a company that's in this for the next three quarters, we're
a company that's in this for next three decades," said Mr. Kovacevic,
who started in the industry as a lobbyist for medical marijuana

Variations of the Canopy scenario have played out at most of its major
competitors. Some have suffered worse problems.

For example, the growing license of CannTrust Holdings was suspended
after Health Canada, the federal regulator, learned that the company
used a false wall to hide an illicit cultivation area from inspectors.

The company's chief executive, a former banker, was fired, and the
company is now under police investigation. Its stock is in danger of
being removed from the TSX exchange in Toronto.

A major problem for growers generally is that it's still not easy for
many Canadians to legally buy marijuana, particularly in Ontario.

Not long before legalization, a Conservative government took power in
the province and swiftly canceled a plan by the Liberal government it
replaced to sell through government-owned stores.

But Professor Amlung said research showed that Canadians
overwhelmingly preferred buying marijuana in stores.

"Online they can't actually see the product," he said. "They can't
smell the product, a lot of those things that are part of purchasing

On Thursday, Ontario announced that it was lifting its limits on store
licenses and will issue about 20 licenses monthly, starting in March
2020. But, for now, the lack of stores in Ontario, as well as in
Quebec, help keep the black market afloat.

Surveys by Statistics Canada have found that only 28 percent of
cannabis buyers meet all of their marijuana needs through legal sources.

There is no legal marijuana shop in Smiths Falls; Canopy was not
allowed to replace Hershey's factory outlet with one of its own. But
nearby in Ottawa, population 1 million, Mimi Lam, a former investment
banker, owns one of three legal shops in the national capital.

Strict marketing restrictions mean that passers-by can't see into her
store, Superette. But once customers pass through an I.D. check to
prove that they are at least 19, they enter a shop that's a pastiche
of a 1950s diner - if one where marijuana buds sit in displays that
would otherwise hold doughnuts and muffins.

One recent evening, most shoppers leaving Ms. Lam's shop, which is on
the busy shopping street of an upper middle class neighborhood,
declined to talk about their purchases.

One of the few people who would talk did so on the condition that she
be identified only by her given name, Shauna. A university student,
she said she feared using her full name might harm her employment
prospects after graduation.

She said there was still stigma attached to using marijuana, adding
that she used it to focus while studying. She said she switched to
Superette from the illegal market over concerns about the safety of
street drugs.

Unlike many people in Canada's marijuana trade, Ms. Lam is making
money although not as much as she had hoped. She said that for the
industry to really succeed, the government needed to loosen

"This is a real opportunity for players in this country to really
shine and show the rest of the world what we can do and push the
boundaries of cannabis integration in society," she said.
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