The legal marijuana industry has been facing troubles since day one. Despite so much hope pinned to the industry and many giant pot producers, the industry has failed to deliver. And it’s not the fault of the industry itself. It had to deal with a substantial black market. The black market is a problem that the government hasn’t been able to curb prior to or alongside marijuana legalization. Legal pot producers can’t compete against the black market’s lower prices.
Weed companies have to jump through several “high” hoops to get their product in the market. They have to run tests, do research, follow farming regulations, and pass stringent criteria for medicinal cannabis. Every step adds to the cost. In two years, many weed companies have come a long way in lowering the per-gram price of legal cannabis they produce, but the black market is no longer the only issue the marijuana market is facing.
Dreadfully slow pot store licences
Ontario, the most populous province in the country, and one that was supposed to be the spearhead of legal marijuana sales, is home to 130 licensed cannabis stores. And the reason behind this paltry number of stores to represent the market output of multiple billion-dollar pot producers is the dreadfully slow licensing process.
Alcohol and Gaming Commission of Ontario (AGCO), the legal body responsible for issuing licences to new pot stores, only issues five licences a week. It means that store owners who spend thousands of dollars developing and preparing their stores have to spend thousands more (every month) on staffing and rent for a store that can’t sell yet because it’s not licensed.
There are about 900 stores still waiting for their licences to come. And thanks to this slow process, they don’t know if they are opening shop in close proximity to another store. The process is so dismal that many potential pot store owners withdraw their application to work on a different business.
And the repercussions are felt by pot stocks. The companies are counting on more stores opening and providing their potential customers easier access to their products. But if stores keep opening (and more of them not opening at all), at this pace, it might take the weed companies a lot of time to solidify their footing in the marketplace.
A weed stock to consider
One weed stock you may want to consider, when the industry (hopefully) recovers, is Canopy Growth (TSX:WEED)(NYSE:CGC). Canopy is one of the largest pot stocks currently trading on TSX. It’s also one of the early birds in the sector. Instead of aggressive growth and acquisitions, the company focused more on cost management and gaining a strong foothold in the medical marketplace. The recent earnings attest to this trend.
The company posted a net loss significantly lower than last year’s. It also beat analyst expectations for the loss. It’s one of the few stocks holding on to the momentum that better sales during lockdown created for many pot producers.
Even if marijuana companies manage to bring their costs down, if the product is not as readily available as the black market is (mainly due to a limited number of cannabis stores), the companies may not see sales rise as high as possible. Pot stores are an essential cog in the big machine, and if it’s not moving in sync with the rest of the cogs, the machine won’t be able to work at full capacity.
Speaking of weed stocks...
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Fool contributor Adam Othman has no position in any of the stocks mentioned.