It’s not every day that a new, large industry is created overnight, but that’s exactly what’s going to happen when Canada legalizes the sale and consumption of marijuana by July 1, 2018.
“It’s a fascinating retail case,” said Kyle Murray, director of the University of Alberta’s School of Retailing, who predicts a flood of players keen to hawk product in an industry predicted to be worth $22.6 billion.
“It will be like when they privatized the liquor business. You’ll have a number of players that will enter the market right away and they’ll try out a bunch of things because we don’t really know how to run this market in a legitimate way yet.”
The federal government is expected to introduce its long-awaited legislation this Thursday.
Like the majority of new businesses, most will fail, said Murray, adding that those who will most likely survive the initial Darwinian phase will be the ones with the deepest pockets.
“You really have to think about your financial strength early on. You’re going to make mistakes and if you’re doing it on a shoestring (budget), the probability of making it is pretty low.”
Murray predicts multiple types of businesses will enter the marijuana marketplace.
A good investment?
It may be tempting to invest in marijuana-related companies, given the sudden spikes in share prices some of them experienced. But is it a good opportunity?
“As a general rule, value firms (those with low price to book ratios) tend to do better than growth firms that are priced high, and marijuana firms don’t have the characteristics of value firms,” said UAlberta finance expert Vikas Mehrotra.
“Liquor stores have a good argument they already do this type of business. But, of course, Shoppers and Rexall will want in, and why not let them? In addition to the retail structure, they have the knowledge to sell it in a more controlled manner.”
Murray anticipates the government will play a central role in regulating the price of marijuana and set reasonable rates to avoid the emergence of a grey market. Without price to compete on, other basics of retail—finding a good location, having a well-trained staff, good product supply and selection, finding ways to engage customers and branding—will be important.
“Some people are concerned the product won’t be as good, but the reality is at some point in the near future, if not initially, it will be better because of the transparent and open competition. If you can go from store to store and check out quality, it’s very different from the system we have now. I think product quality will jump,” said Murray.
—With files from Geoff McMaster