A pedestrian passes a Jak’s liquor store in Vancouver. The owners of the Jak’s chain say they worry the legalization of cannabis will cut into their existing sales.BEN NELMS/The Globe and Mail
The Kettlewell family has been in the business of selling alcohol for decades. These days, the family owns 11 liquor stores in British Columbia.
Business has been good, as the Kettlewells have doubled the number of their Jak's Beer Wine Spirits stores in the past five years. But what most intrigues the Kettlewells these days is a new product: cannabis.
The emerging rules around the legalization of cannabis vary by province. In general, governments will be heavily involved – and the sale of cannabis will be kept apart from alcohol, following Ottawa's recommendation. In B.C., however, a unique landscape is being considered, one in which government-owned liquor stores, as well as private liquor stores, sell cannabis. Alongside these stores, currently illegal cannabis dispensaries might also be allowed to operate in the legal market.
The Kettlewells and other liquor stores are worried that cannabis will cut into their existing sales. New academic research in the United States shows that in places where medical marijuana has been available in the past decade, alcohol sales have fallen. While liquor stores expect heavy cannabis regulations and a nascent market where profit margins could be thin, they still want in, worried about the greater risk of being excluded.
"As entrepreneurs, we're looking for new opportunities," Damian Kettlewell said. "And we're concerned about declining alcohol sales."
Recreational cannabis, for years a murky black market whose annual value was estimated to be in the billions, will step out of the shadows when the federal government makes it legal this summer. Investors are excited about the prospects, as shares of publicly traded cannabis growers in Canada have soared. The legal retail market could be worth upward of $6-billion a year, Ottawa's Parliamentary Budget Officer has estimated.
The challenges, for many, are vast. To set up new stores will take time and cost money. Taxes will have to be careful imposed to keep prices competitive with black-market sales. Governments that want to monopolize online sales will find it difficult to do so, experts say. And other large existing businesses – such as beer makers and pharmaceutical companies – are considering what their next move should be. Alcohol and cannabis are not considered to be complementary, where a person buys some of one and also the other. Cannabis, research shows, can be a substitute for alcohol.
In B.C., an unusual retail alliance has formed. The B.C. Government and Service Employees' Union – whose members include about 5,000 workers in the liquor store system – has teamed up with the association that represents the almost 700 private liquor stores. They call themselves the Responsible Marijuana Retail Alliance and have lobbied the B.C. government, saying that they are best positioned to sell cannabis, with existing stores and staff that already handle a controlled product.
The province is expected to announce its plans in the next month or so. B.C. Solicitor-General Mike Farnworth has said cannabis will be sold by a mix of public and private retailers – and didn't rule out that it could include existing public and private liquor stores. "It's a business opportunity and we can do this well," said Jeff Guignard, executive director of the Alliance of Beverage Licensees. "But for a business opportunity, there is a lot of risk."
It will take time for the legal market to establish itself.
"We're not expecting it to be preposterously profitable in the short term, like you hear a lot of people talking," Mr. Guignard said. "Long term, it should be a profitable business channel."
Stephanie Smith, president of the public workers union, questioned whether the cost of new and separate cannabis stores – a tack other provinces such as Ontario is taking – was a good idea for B.C. taxpayers.
"We think our proposal makes sense for British Columbia," Ms. Smith said.
The costs to establish a new retail network – whether it is the Liquor Control Board of Ontario or otherwise – are significant.
"People have come to the stark realization that the upfront costs of setting up a distribution network are substantial," said Darrell Dexter, a consultant at Global Public Affairs who focuses on cannabis. Mr. Dexter is also former premier of Nova Scotia.
Nova Scotia is the only province to date that has decided to sell cannabis alongside alcohol, in its government stores. The approach has been rejected elsewhere, after warnings by public-health experts that co-location could encourage more people to use cannabis.
Another factor, in B.C. and elsewhere, is the network of dispensaries that sell cannabis already. Cannabis remains illegal without a prescription but a typical store requires only identification to show that a buyer is of age. In Ontario, the province plans "massive fines to wipe out dispensaries," said Rod Elliot, another Global Public consultant, as the government readies to defend its planned monopoly.
Mr. Dexter said a question for all provinces is "how they're going to respond to people operating outside the distribution chain."
Don Briere, president of Vancouver-based Weeds Glass and Gifts Ltd., is one such vendor. He has served jail time for growing and selling cannabis. About five years ago, he started his Weeds chain. There are 17 now, the majority in B.C. but also in Alberta, Saskatchewan, Manitoba, Ontario and Quebec. About one-fifth of his business is online.
Mr. Briere said his net profit margin is about 16 per cent to 18 per cent.
"I would say it's pretty good," he said.