Ontario cannabis retailers frustrated by increasing number of unlicensed stores

October 22, 2024 | Jonathan Hiltz

While on the campaign trail way back in January 2014, Justin Trudeau spoke about his plan to legalize cannabis and added some reasons why, including this one:

“We are funnelling millions upon millions of dollars each year into organized crime and criminal gangs. We do not need to be funding those organizations.”

Now, as Canada witnesses the sixth anniversary of its historic end to cannabis prohibition, it is evident that the legal industry is, at best, co-existing with a thriving black market. At worst, there is a clear indication that illicit cannabis has a choke-hold on cultivators, manufacturers, and retailers, who are trying to follow a laundry list of regulations, taxes, and incredibly slim margins.

A perfect example of a sector in need of immediate assistance is our retailers. In theory, the presence of legal cannabis stores in neighbourhoods across the country should be a deterrent for unlicensed brick-and-mortar locations because trained eyes, such as law enforcement, can tell the difference between them. For some provinces, however, the illegal stores are not only in plain sight and openly advertised, they are eating the legal retailers’ lunch by stealing many of their customers.

“It appears the number of [illegal] stores is on the rise,” said Paul McGovern, President of Vertie Cannabis, a licensed retailer at 180 Carlton Street in Toronto.

McGovern was not quick to point the finger at anyone in particular and added that this is a complex issue. He also said that the level of organization and enforcement is seemingly different from province to province.

“Some provinces have given a lot of thought to the matter and are doing things to try and keep a lid on the unlicensed market. I would say there are others, like Ontario, that are not.” He added that it seems enforcement of this problem has taken a back seat in his market, but he does not blame the police.

“The level of police resources today are strapped [as it is] with so many other public realms,” he said. “It’s important to be fair to them. It’s not easy, and as this thing snowballs and gets worse and worse we’re looking at a really big problem.”

What’s the plan?

McGovern said one of the culprits that triggered this proliferation of illegal stores was a lack of planning from a higher level than law enforcement. “The only funding, to my knowledge, is a mere $33 million over 3 years for the OPP to do some very minimal targeted enforcement.”

He added that in BC, as an example, there is a dedicated enforcement team, the Community Safety Unit (CSU), which comprises a group of special constables. These officers were not taken from police resources and they operate with the help of retired investigators and others who understand the laws and how to enforce them. They have had a successful response and McGovern is well aware of that. “If we had even a fraction of that in Ontario, we wouldn’t be talking about the problem we are today.”

Another retail operator, Sativa Bliss, with stores in various Ontario cities, has also had direct experience with this problem. “One of my locations, in St. Catherines, was a victim of an illegal cannabis store,” said Jazz Sarma, Owner of the chain. “Thankfully, we were able to work with the city there and get it shut down.”

Sarma said that he and other local retailers in St. Catherines came together, approached the mayor, and got the job done. “They haven’t come back. They say they only do delivery now.”

The store was almost directly across the street from Sarma’s, and it most certainly affected his business, which he said dropped by as much as 50 percent.

It’s not me, it’s you

A few years ago, when legalization was basically at the toddler stage, it was easy to say that the customers didn’t know the difference between legal and illegal stores, but we’re six years old now.

“Some people may tell you they don’t know if it’s legal or not, but it’s kind of obvious once you start shopping at a legal store and then you go to an illegal one,” said Sarma. He added the reason people go to illicit stores is cheaper products, no taxes, and, in some cases, they sell other illegal drugs as well.

This illicit activity is not just relegated to brick-and-mortar either: delivery services have also been affected.

Mike Dunn is the co-owner of 1922 Cannabis, a retail store and delivery service at 120 Sherbourne St. in Toronto. He was so busy trying to compete with illegal delivery services that he was almost unaware of the sheer amount of unlicensed stores cropping up. What he did notice is that retail cannabis customers were seemingly vanishing from his particular area, and he later found out it was because illegal stores were taking them.

Dunn went through the numbers based on his experience and estimated that some of these stores could be making over $150,000 per month. “They’re doing it through high-volume, low-quality transactions.”

To the city’s credit, Dunn said that recently, seven stores that he is aware of were raided, the products seized, and the locks changed on the doors. He feels the real test of the system will be how fast they re-open. “My hypothesis is that within the next three or four days, they will be back open,” he said. “Right now they are closed but I have seen people in both of them and yesterday I saw someone drilling at the locks at one location.”

The good news is for now, with these stores closed, business has improved for 1922. “We’ve had a huge increase in foot traffic. We’re probably up about 30 percent. I’d say everyone in the area that’s got a legal door has probably seen an increase.”

What does the city say?

StratCann reached out to representatives at the City of Toronto, and their response revealed a need for the province to review the Cannabis Control Act, which has not been updated since before legalization.

“In March, 2024 Toronto City Council requested the Province of Ontario undertake a comprehensive review of the Cannabis Control Act, 2017, in consultation with municipalities, including roles and responsibilities, funding, and enforcement, and addressing unlicensed cannabis establishments,” said Shane Gerard, Senior Communications Coordinator. “The Cannabis Control Act, 2017 has not undergone a comprehensive review since it was introduced seven years ago.”

He added that the province is responsible for licensing and regulating private cannabis retail stores through the AGCO, who in-turn enforce the regulations. Further, Gerard said that the city does, in fact, go after property owners.

“The City can, and does, file charges against property owners who are in contravention of the Cannabis Control Act. Individuals charged can face fines of up to $250,000 and face imprisonment of two years (minus one day).”

The city also pointed out that the current Cannabis Control Act provides limited authority to municipal by-law officers.

“These officers do not have arrest powers and are not permitted or trained to use force while carrying out enforcement activities. This makes the enforcement of unlicensed cannabis dispensaries challenging and presents health and safety risks to officers.”

Whatever the reasoning, be it inefficient funding for police resources, lack of planning, less diversity and advertising for legal products, or other factors, it’s clear the legal cannabis industry is struggling to be the choice for Canadians.

Although no timeline was given by Mr. Trudeau back in 2014 when he said he wanted to stop illegal profits from cannabis, there is a sea of people from coast to coast working hard in the legal sector who hope this happens much sooner than later.

~This is the second in a series StratCann has published on the illicit cannabis market in Canada. The first is on the online illicit cannabis market.