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article imageCannabis sales expected to top liquor sales in Canada by 2020

By Karen Graham     May 9, 2018 in Business
Ottawa - The Canadian Imperial Bank of Commerce (CIBC) released a report Tuesday titled, Cannabis: Almost Showtime, which provides a very positive outlook on the pending legal cannabis industry in Canada.
And this may come as a surprise, but CIBC is forecasting that cannabis sales will eclipse liquor sales by 2020. In a report released on Tuesday, CIBC estimates that in two years, Canadians will consume 800,000 kilograms of cannabis, mostly for recreational use, according to CBC Canada.
According to the analysis, Cannabis: Almost Showtime, " by 2020, the legal market for adult-use cannabis will approach $6.5 billion in retail sales. For context, this is greater than the amount of spirits sold in this country, and approaches wine in scale."
The legalization of marijuana for recreational use has been in the works for over a year, and despite some delays, the federal government is expected to legalize pot later this summer. And when that happens, CIBC suggests Canada will be entering a whole new arena with the establishment of the new marijuana industry.
Speaking to reporters alongside the Portuguese Prime Minister António Costa  Trudeau said cannabis ...
Speaking to reporters alongside the Portuguese Prime Minister António Costa, Trudeau said cannabis use will be legal by summer.
Prime Minister Justin Trudeau
This year will see the advent of a new industry
And it will lead to some interesting questions that everyone will have on their minds - Which producer will come out on top? Who will be the top cannabis retailer? Will large, multinational tobacco or alcohol firms rush to the sector looking for new avenues for growth? How much will the cannabis cost?
Just as important, perhaps, is how much additional growth in the international and medical marijuana market will Canada be able to take advantage of before other nations want to own the process themselves? Then, there are assorted issues to consider, like brand development, merchandising, assortment, pricing, advertising, and the development of derivative products.
According to CIBC, it looks to be an exciting couple of years ahead for the new industry as it gets itself on a firmer footing. One of the big issues mentioned was the alcoholic beverage companies and what could happen if people switched from liquor to pot as a preference.
Untitled
Loblaw Companies Ltd.
In 2017, Canadians spent $5.1 billion on spirits and $7 billion on wine. Another $16 billion was spent on tobacco, according to Statistics Canada. And the report also noted that 5.0 million Canadians consumed marijuana in 2017, and recreational use wasn't even legal yet.
According to the report, "alcohol companies may begin to buy and build their own cannabis facilities, racing to catch up to the existing LPs and bidding up asset prices to triple their current market caps,” if consumers quickly begin swapping alcohol for cannabis.
Provinces will be the real winners
Obviously, most of the revenue from cannabis sales will benefit the provincial governments and not private companies. "The bulk of the value generated from this industry will accrue to Canada’s provinces. In fact, we estimate that provinces will generate over $3 billion of income, either in the form of earned profits or taxation revenues,” the CIBC analysts John Zamparo, Prakash Gowd, and Mark Petrie wrote in the report.
In a separate report issued on Tuesday, rating agency Moody's said provinces can expect to bring in more than $150 million in revenue just from their share of taxes on the drug, led by B.C. at $50 million, with Ontario and Alberta not far behind.
Over a dozen EU countries have authorised the use of cannabis for medical purposes
Over a dozen EU countries have authorised the use of cannabis for medical purposes
Robyn Beck, AFP/File
While suggesting that any negatives are far outweighed by the positives, Moody's said, "Legalization has the potential to reduce the burden on the judiciary, boost employment and offer a new revenue stream for First Nations populations."
Cost-wise, the provinces will have to keep the price of marijuana fairly low to get the industry off the ground or else they could lose out to the black market. "Retailers who think $20/gram cannabis is attainable will quickly find consumers walking out of their stores, pulling out their phones, and DM-ing their previous dealers to see if they can still get that deal on Bruce Banner at $8/gram.”
CIBC also has a warning for investors looking at companies who have decided to get into the cannabis industry at this late date. “We suspect some of the jobs that are “in progress” likely won’t ever see the light of day. It’s our view that for producers who are only now getting started, they probably will not secure supply agreements with buyers, and the capital required to complete these projects will disappear,” the authors write.
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