Legal marijuana market set to be worth $4.34 billion in 2019

15 June 2018 Authored by Consulting.ca

As recreational marijuana is set to become legal this summer, the industry will be partially thrust out of the black market and onto the shores of legitimate business – and government taxation and regulation. Though a large illegal market will remain, the legal market is set to be worth up to $4.34 billion by next year, according to a recent Deloitte report.

With Canada’s C-45 cannabis bill caught up in Senate wrangling, Canadians are now looking at nationwide marijuana legality closer to the end of summer or early fall, rather than the July 1st date long-branded into the minds of anxious tokers. But it’s just a matter of time now before Canada becomes the first G7 country with nationwide, legal recreational cannabis (Uruguay was the first country to legalize it, in July of last year).

The prospect of legalized cannabis has already spurred a huge deal of entrepreneurship and innovation. With legalization, the Canadian government hopes to break up the illegal trade of marijuana, while reaping taxes from the drug, as it does with other ‘vices’ like alcohol and tobacco. Legalization also reduces resources spent on imprisonment and policing in regards to marijuana, while removing a possible source of revenue for criminal organizations by pushing it into a legal, regulated sphere.

In order to find out some of the contours of the heady new frontier of legal cannabis in Canada, accounting and consulting firm Deloitte has released its 2018 Cannabis Report, titled ‘A society in transition, an industry ready to bloom.’ The report examines probable market size, as well as consumer preferences and behaviour.

Recreational cannabis - Market size

Deloitte estimates that the total cannabis market – including medical, legal, and illegal recreational products – will have sales of up to $7.17 billion in 2019. Up to $4.34 billion is expected to come from the legal recreational market. Consumption through legal channels is predicted to rise by 35%, while the overall spend is expected to rise by as much as 58% - primarily because of higher legal product pricing.

Legalization is expected to shift the majority of purchases to legal channels, with current marijuana consumers in Canada saying they’ll move 63% of their purchases to legal sources. In Quebec, however, a lower proportion of 47% is expected to switch to legal channels. Notably, less frequent consumers are more likely to buy legally (69%) than daily consumers (37%), possibly because of price concerns and/or habit.

Consumers say they’re willing to pay more for regulated and legal cannabis, but how much depends on what province they’re in, and, as mentioned above, their consumption habits. In Ontario, respondents are willing to pay a loonie more per gram (from an average of $8.33 today to $9.33). In Quebec, where current average prices are the lowest, ($7.53 per gram), consumers are only willing to pay up to $7.81 per gram – or just 3.7% more.

Price upon legalization

Deloitte finds that legalization will bring in older consumers than today’s illegal marketplace. Today’s consumers tend to be younger ‘risk takers,’ with a high school or college education, who are willing to technically break the law for a toke of reefer. Legalization will bring in older ‘squares’ – typically middle-aged, with a university or graduate level education. Unlikely to have a large social network, these more conservative experimenters will be unlikely to consume more than once a month.

That said, 74% of them have consumed cannabis before, and 41% have partook within the last five years. Legalization and the removal of risk, be it legal or health & safety related, will entice more of this category to occasionally return to their ‘college days.’

Making the Switch

Reasons to transition to legal channels

Legalization isn’t enough to convince most current users to abandon their suppliers, but Deloitte suggests that the right mix of quality, price, and safety will get tokers to switch rather than fight. Over half of respondents not planning purchase all their cannabis legally said that better-quality products at a range of price points adequate for all budgets would get them to leave the illegal market. 41% responded that they would switch for products that are certified safe to use.

Brand names don’t carry the same importance as the above criteria, with only 16% saying a familiar brand name would get them to switch completely to the legal market. This is perhaps unavoidable, as there is no Coca-Cola of weed, and advertising will be limited as it is for cigarette companies. Deloitte expects firms that analyze and respond to customer needs, improve customer experience, and fine-tune product quality will be able to snag more customers from the black market in the future.

Purchasing behaviour: frequency and amount

Cannabis purchasing is going to become more frequent among purchasers of all types after legalization, suggesting that cannabis consumption will rapidly become an even more normalized activity. According to Deloitte’s survey, purchases by frequent users is set to rise 22% after legalization, going up from 2.5 times per month to 3.1 times per month. Purchase amount, however, will remain the same for frequent users, at just under $100.

There will be higher effect on current and likely less-frequent users, with purchase frequency expected to rise 121%. Average total spend is likely to rise from $16.61 to $27.87 per quarter year, an increase of 68%.

Consumption behaviour: frequency of use

Though frequency of purchase may go up after legalization, levels of consumption won’t significantly increase, according to the report. 41% of all consumers will use cannabis products less than once a month. Of current users, those that consume daily will stay unchanged at 20%; those use cannabis 1-6 times a week will increase from 33% to 35%, while those that consume once or twice a month will rise from 24% to 27%. Current users of less than once a month will shrink from 23% to 18%, driving the marginal growth in the other categories.

The report also found that consumers will use slightly more per occasion after legalization. The average amount consumed per occasion is expected to rise 11%, from 0.82 g to 0.91 g – an increase Deloitte attributes to the anticipated popularity of cannabis-based edibles.

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