Where Ontario’s Minimum Wage Increase Is Most Likely to Hurt Cannabis Producers

Recent discussion about the impact of a new $14 minimum wage in Ontario has ramped up, with a heated debate creating somewhat of a spectrum of opinions on just how well this minimum wage hike has been rolled out.

In the case of Restaurant Brands International Inc.  (TSX:QSR)(NYSE:QSR), a significant amount of media attention has been paid to a select number of Ontario-based Tim Hortons franchises in which the franchise owners were forced to cut back on employee hours and benefits due to the minimum wage hike and the lack of flexibility in terms of pricing from the company’s head office. This has spurred outrage among some, including fellow Fool contributor Will Ashworth, who recently suggested investors boycott Restaurant Brands’s stock in retaliation for what has been perceived as a slight on the hard-working employees at Restaurant Brands’s franchises.

With the minimum wage hike impacting a wide range of industries that have manual labour as a driver of profitability, the marijuana production sector has recently been identified as another industry that may be negatively impacted by this regulatory change, as many of the employees of cannabis producers are paid at a minimum wage pay scale — a reality which may result in Ontario-based producers reporting higher all-in cash costs in the near term.

As cannabis producers attempt to increase efficiencies and grow production in a pre-legalization world, one of the most important metrics investors have placed an emphasis on is the price per gram that companies such as Aphria Inc.  (TSX:APH) or Canopy Growth Corp.  (TSX:WEED) incur, as producers scramble to produce the best-quality cannabis at the lowest cost. Value investors’ gain from the scale that Canada’s largest producers provide thus may be negatively impacted by this hike.

While the potential impact of minimum wage hikes on Ontario producers is a prescient issue that investors should consider, another factor which perhaps may be more important to consider is how the impact of rising wages at the retail level (i.e., government-run cannabis stores) will impact the amount provincial governments are willing to pay for cannabis.

The idea that margins could actually be squeezed from both the supply and demand end of the equation is one that should be taken seriously by investors. It is common knowledge that government employees of provincially run liquor stores earn hourly wages that can be much higher than the prescribed minimum. A rising tide is likely to lift all boats; as such, I expect the unions representing provincially run retail stores to ask for wage increases, which may indirectly affect how much provinces are willing to pay for cannabis.

It is certainly not a leap to suggest far-left provincial governments will begin demanding that producers “pay their fair share” and absorb the sky-high costs associated with a publicly run retail model in many provinces (not all, but many of the largest and most important provinces to the national cannabis industry have indicated a preference for publicly-run retail and distribution for cannabis).

Stay Foolish, my friends.

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Fool contributor Chris Macdonald has no position in any stocks mentioned in this article. The Motley Fool owns shares of RESTAURANT BRANDS INTERNATIONAL INC.

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