Quebec Combatting Black Market Prices with Hexo

Hexo is selling an ounce of "high quality flower" for just over $125.

Gatineau, Quebec, Canada - June 8. 2019: Quebec Cannabis Corporation (SDQC) store in a strip mall on Boulevard de la Gappe. The provincially owned corporation is responsible for the sale of recreational cannabis in the province has been in operation since cannabis became legal in Canada in 2018. iStock / PaulMcKinnon

Despite country-wide recreational legalization last year, in October of 2018, the high cost of legal cannabis has perpetuated the existence of illegal grey market cannabis businesses in Canada.

In fact, a survey of Canadian cannabis consumers found that over half were still buying cannabis illegally, with the majority citing cost as the primary reason. This is according to the results of the National Cannabis Survey by Statistics Canada.

Canadian cannabis producer, Hexo, is attempting to make a serious dent in the illicit cannabis industry by flooding the country’s legal market with low-cost marijuana.

Based out of Quebec, the company is poised to release a new product – an ounce, or 28 grams, of “high-quality cannabis flower,” branded Original Stash, and containing between 12 and 18% tetrahydrocannabinol (THC) – for the price of $4.49 a gram. All in all, that ounce will put you back $125.70 in total, including tax. Compare that to $7.37 per gram, the average cost of legal cannabis in a dispensary, according to the results of recent crowdsourcing analysis done by Statistics Canada.

In an interview, Hexo Chief Executive Sebastien St-Louis explained the reasoning behind the low prices, arguing, “That 51 percent of Canadians that buy illegally, when they walk into their dealer, they don’t pay tax…Hexo is absorbing that cost for them. We’ve listened, we’re removing their reason for not shopping legal.”

Not everyone is a fan of the attempt to aggressively drive down the price of legal cannabis, and some have questioned the potential quality of any product that could cost so little.

Analyst Owen Bennett has criticized Hexo’s marketing strategy, calling it “an aggressive move to address limited demand for Hexo and increase market share,” adding, “We question how successful it will be given current legal demand is for higher quality and the $125 price is not consistent with illicit purchasing habits. We do not see this as a precursor to industry-wide price compression, which we see more isolated to low quality and oil.”

RBC Capital Market analyst, Douglas Miehm, wrote in a note in response to the move by Hexo: “Pricing must also be complemented with a certain level of quality to achieve sell-through. The latter is unclear at this stage, and thus, we would need more evidence of this before viewing the strategy in a more positive light.”

Meanwhile, Hexo’s stock is dropping, and the company recently laid off 200 employees, nearly a quarter of their workforce, while simultaneously announcing plans to permanently shut down one of its facilities in Niagara Falls. In an announcement just last week, the company put out a News Release on their website, titled “HEXO Corp aligns its operations with its 2020 expectations and reduces cost structure,” and that reads, in part, “HEXO Corp announced today it has taken steps to reduce its workforce. The Company is rightsizing its operations to adjust to a changing market and regulatory environment with a view towards profitability and long-term stability.” Read the statement in its entirety here.

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