A society in transition, an industry ready to bloom 2018 cannabis report

Transcript

1 A society in transition, an industry ready to bloom 2018 cannabis report

2 Table of contents 1 The cannabis era dawns Canada’s new growth industry 4 Canadian consumers: demographics and behaviours 8 Channel and purchase preferences 14 Implications and considerations 24 A society in transition, an industry poised for growth 28

3 A society in transition | The cannabis era dawns The cannabis era dawns he world is watching as Canada steps into the spotlight as the first 1 G7 country to legalize recreational cannabis nationwide. This year, cannabis will become legal at the federal, provincial/territorial, and T local levels. Public officials are balancing health, safety, and revenue as they strive to undermine the illegal market, ensure a safe and controlled supply, and keep cannabis out of children’s hands. If successful, Canada will win global acclaim and set an example for other nations. The federal government’s push for legalization has already had a powerful effect, sparking a wave of innovation and entrepreneurship that shares the fast-growing, can-do spirit of our technology sector. What will the legal market look like? How will public officials balance health, safety, and revenue priorities? And who’s going to be buying? To shed some light on the subject, Deloitte surveyed current and likely recreational cannabis consumers across the country in early 2018 to gain insights into how consumption levels may change, what kinds of products consumers would be interested in, and how and where they’d like to purchase—in short, what consumer demand means for the cannabis market. 1

4 A society in transition | The cannabis era dawns Majority of recreational cannabis The market is significant High product quality sold will be legal The total cannabis market in Canada, and integrity as well as including medical and illegal as well as Canadians who are already consuming legal recreational products, is expected cannabis expect to buy nearly a range of competitive to generate up to $7.17 billion in total two-thirds of their products from legal price points will be sales in 2019. Legal sales are expected retailers once they can. High product to contribute more than half of this quality and integrity (as affirmed by needed to persuade total—up to $4.34 billion—in the first quality testing) as well as a range of current consumers to year. Current and likely consumers competitive price points will be needed move their purchases expect to pay slightly more for legal to persuade current consumers to products, with the former saying they’re move their purchases over to legal over to legal sources. willing to pay 10 percent more. sources. Delivering a superior customer experience will be of vital importance. 2

5 | The cannabis era dawns A society in transition Customers demand privacy, Tomorrow’s consumers security when purchasing Today’s typical cannabis consumer is what we might describe as a risk Approximately one-third of recreational taker. Perhaps not surprisingly, they’re cannabis consumers indicate an more likely to be young (aged 18-34), interest in buying products online and in their quest to live life to the through approved retailers’ websites, fullest, they’re more likely to put their and they worry about the privacy and health or safety at risk. They often security of their personal information. consume cannabis several times a Even in-store consumers will be sharing week. Legalization is expected to attract personal information with retailers, more of a conservative experimenter— such as allowing their ID to be scanned typically one who is aged 35-54, at point-of-sale terminals and their The legalization of has a university or graduate school image captured on security cameras. ecreational cannabis marks r education, and has family or other The fact that governments are a significant transition for responsibilities. They’re expected to involved in cannabis retail means that Canadian society but while consume less than once a month. That consumers expect their information the industry is controversial, said, likely consumers are far from to be protected, especially online. we also need to remember neophytes: 74 percent of them have Online retailers will need to ensure they 2 that this category has spurred had prior experience with recreational embed privacy-by-design principles innovation, entrepreneurship, cannabis, and 41 percent have used it and invest in robust e-commerce and jobs. What is certain is that in the past five years. cybersecurity measures. legalization will open the doors to a dynamic, sophisticated Consumers will buy more Will cannabis be a complement industry that will create new frequently—and spend more for liquor—or a substitute? jobs, new opportunities for After legalization, current frequent Many liquor boards across Canada businesses, and new revenues cannabis consumers expect to buy will be playing a prominent role as for government. And executed more often than they do today. Current distributors and retailers. They may well, legalization will also help but less frequent consumers also soon discover such sales are affecting shift a considerable proportion their traditional lines of business, expect to purchase products more of cannabis consumption to because our survey suggests that often, and spend significantly more legal channels in the years cannabis may serve a larger role as a when they do—up to 68 percent more. to come. substitute for beer, spirits, and wine. All alcohol categories are expected Bricks-and-mortar matters to be affected, which could have a Current and likely cannabis consumers negative impact on the revenues for expect to purchase the majority of their government, liquor companies, products at physical retail locations. and retailers. Knowledgeable staff and clearly displayed prices will play a critical role in the success of cannabis retailers’ bricks-and-mortar stores, further driving home the point that retailing fundamentals such as convenience, customer experience, product choice, and product and location safety matter as much to these retailers as those in more traditional segments. 3

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7 A society in transition | Canada’s new growth industry Canada’s new growth industry A sizable market awaits Overall consumption through legal channels The total cannabis market in Canada, including i s expected to rise by up to 35 percent, as medical, illegal, and legal recreational products, likely new consumers offset the proportion is expected to generate up to $7.17 billion in of current ones who elect not to transition to sales in 2019—up to $4.34 billion of which legal channels. The cannabis spend overall will come from the legal recreational market. is also expected to rise by up to 58 percent, Medical cannabis is anticipated to generate an owing primarily to the fact that prices for legal additional $0.77 billion to $1.79 billion in sales, products will be higher. with the illegal market bringing in a further $0.51 billion to $1.04 billion. Recreational cannabis: market size Difference $1.34–2.75 billion $470–1,590 million Canada $1.81–4.34 billion $0.42–0.87 billion $150–500 million West $0.57–1.37 billion $0.52–1.06 billion $180–620 million Ontario $0.70–1.68 billion $0.31–.64 billion Quebec $30–110 million $0.42–1.00 billion $0.09–0.18 billion Atlantic $110–360 million $0.12–0.29 billion Projected legal market size Estimated current size Deloitte analysis Source: 5

8 | Canada’s new growth industry A society in transition Legal cannabis market Proportion of cannabis products likely to be purchased through legal channels Eliminating the illegal market is one of the objectives of legalization. % % % % % 63 55 66 47 65 Quebec Ontario West Atlantic Canada Current cannabis consumers who say Majority of purchases will t hey’ll transition all of their purchases shift to legal channels to legal channels are more likely to Eliminating the illegal market is one be men with at least a university or of the objectives of legalization. It’s graduate school education and an encouraging, therefore, to note that annual income over $50,000. Current current cannabis consumers are consumers who don’t intend to buy any expected to move nearly two-thirds cannabis through legal channels are (63 percent) of their purchases to legal more likely to be aged 55 or older, and channels, whether through bricks-and- have a high school education or less. mortar retailers or online channels. Quebec consumers are rather less likely to do so, however; only 47 percent plan to shift to legal avenues. It’s notable that less frequent consumers are much more likely to buy through legal retailers (69 percent) than are daily consumers (37 percent). 6

9 A society in transition | Canada’s new growth industry In Ontario, for example, consumers Consumers willing to pay a who today pay an average of $8.33 premium—up to a point per gram are willing to pay up to $9.33 According to our survey, Canada’s per gram—12 percent more—for current average price for illegal legal product. In contrast, Quebec cannabis is $8.24 per gram. It’s consumers, who today pay the lowest noteworthy that no matter the average price in the country ($7.53 per province, survey respondents say gram), are only willing to pay up to they’re willing to pay more for products $7.81 per gram for legal products. grown and processed under the federal That’s just 3.7 percent per gram higher. government’s new regulatory regime and sold through legal channels. In fact, a majority (55 percent) of current consumers expect to pay more after legalization. How much more they’re willing to shell out, however, varies depending on where they live and their current consumption habits. Price upon legalization Canada West Ontario Quebec Atlantic Current average price $8.24 $8.36 $8.33 $ 7. 5 3 $ 8 .17 per gram (illegal market) Price users are willing $9.04 $8.98 $8.89 $9.33 $ 7. 81 to pay after legalization Price difference increase $0.74 $0.53 $1.00 $0.28 $0.87 (6.3%) (% difference) (12.0 %) (9.0%) (3.7%) (10.6%) 7

10 A society in transition | Canadian consumers: demographics and behaviours Canadian consumers: demographics and behaviours Who’s going to be buying when cannabis is legal? But legalization is bringing in an ur research indicates that older consumer. This consumer is tomorrow’s likely cannabis more of a conservative experimenter— consumer will be somewhat O typically middle-aged, with a university different from today’s. This provides or graduate school education. They some clues as to what the post- don’t tend to put their personal legalization environment will look like. interests before family needs or other responsibilities. They’re unlikely to Today’s consumer is what we describe have a big social network. And they’re as a risk taker. They’re young, typically more likely to consume less than with a high school or college education. once a month. In their quest to live life to the fullest, they’re more likely to put their health That said, probable consumers or safety at risk, even going so far as to aren’t neophytes: 74 percent of skirt or break the law. And they often them have had prior experience with consume several times a week. recreational cannabis, and 41 percent have consumed it in the past five years. Legalization may provide some Canadians with the opportunity to occasionally return to their younger days—legally. 8

11 A society in transition | Canadian consumers: demographics and behaviours The current and likely user More likely to be More likely to be ages of 35-54 between the between the ages of 18-34 More likely to More likely to less than consume consume multiple once a month times a week The risk taker The conservative experimenter More likely to have a More likely to have a maximum education of maximum education of high school college or or university graduate school The likely cannabis user The current recreational (following legalization) cannabis user Less likely to be an More likely to online influencer and deviate from the have a large social network letter of the law More likely to take Less likely to prioritize health and safety risks personal interests ahead to enjoy life and have of family interests a fuller experience 9

12 A society in transition | Canadian consumers: demographics and behaviours Socializing also drives the consumption What drives consumption? of current consumers. Fifty-eight Amid all the discussion over legalization, percent say they indulge to have fun it’s easy to overlook an important with friends, while 25 percent of those question: Why do people want to aged 18 to 34 say they use cannabis consume cannabis in the first place? to connect with others. More than half What need or needs does it address? (57 percent) have it with a small group Nearly half (48 percent) of friends; slightly more (59 percent) Roughly two-thirds of the current consume at home alone, however. of cannabis consumers recreational consumers who responded to our survey say they use cannabis overall—and 69 percent Nearly half (48 percent) of consumers to help them relax, sleep, or reduce of daily consumers— overall—and 69 percent of daily stress and anxiety. Women are more consumers—say they use cannabis to likely to consume for these reasons; say they use cannabis improve their mood. More than a third 74 percent say they use it for relaxation to improve their mood. of daily consumers (35 percent) report or sleep, compared to 59 percent of doing so to help with their thinking men, and 69 percent do so for stress or or concentration. anxiety relief, versus 55 percent of men. Thirty-five percent of current women consumers report using cannabis for medical reasons such as acute pain relief, while 24 percent of men report using it for this reason. Reasons for using recreational cannabis To help relax or sleep 66% To reduce stress or anxiety 62% To have fun with friends 58% To improve mood 48% As an alternative to alcohol 41% To make activities more interesting 34% For specific medical reasons 29% such as acute pain relief, etc. To increase creativity or expressiveness 26% To heighten senses 25% To improve sex life 19% To help connect with others 18% 10

13 | Canadian consumers: demographics and behaviours A society in transition only 16 percent say a familiar brand Retailers that are able to secure the supply chain, would play a part in persuading protect and analyze customer data, and promote public them to completely move to legal cannabis outlets. health and safety will be well positioned to achieve a competitive advantage. Over time, as retailers develop a better understanding of their customers’ them to move away from the illegal What will draw current needs and behaviours, improve their market. Quebec respondents aren’t consumers to legal channels? customer experience and engagement as concerned about price—perhaps Legalization alone won’t persuade programs, and fine-tune their products’ because prices in their province are most current cannabis consumers quality and integrity, we could expect already Canada’s lowest—but they to completely abandon their existing to see an increasing share of cannabis are interested in safety: 41 percent suppliers. But our research suggests sales transition to legal sources. feel offering products that are the right mix of quality, price, and safety Retailers that are able to secure the certified as safe to use is just as could just do the trick. supply chain, protect and analyze important as providing better-quality customer data, and promote public products overall. More than half of current consumers health and safety will be well positioned who don’t plan to purchase all their to achieve a competitive advantage. While quality, price, and safety cannabis through legal channels say are important criteria for current that offering better-quality products consumers, brand names don’t and a range of price points suited to appear to have the same impact: every budget would be needed for Reasons to transition to legal purchase channels Better-quality products 55% A range of price points for every budget 54% Products that offer a range of potency 47% A range of products that target specific 44% effects on the body Products that are certified to be safe to use 41% Non-combustible products like gel capsules 26% Familiar brands 16% Vaping products 15% Other 6% 11

14 | Canadian consumers: demographics and behaviours A society in transition We see a more significant change According to our survey, purchases by Expect more frequent in behaviour among less frequent current and likely frequent cannabis purchases after legalization consumers, both current and likely. consumers are set to rise up to Producers and retailers, take After legalization, purchase frequency in 22 percent after legalization, to just note: consumers of all types expect this group is poised to rise 121 percent, over three times a month, although the to buy cannabis more often after with the average total spend rising overall amount spent each month is set legalization, and less frequent nearly 68 percent (to $27.87) roughly to remain relatively steady, hovering consumers expect to spend more. every three months. Current consumers around $99. Likely frequent consumers This strongly suggests that cannabis will likely buy products slightly more appear ready to buy more often consumption will become a normalized often and spend slightly more than than those who are already frequent activity more quickly than many might probable future consumers. consumers (3.4 times per month versus have anticipated. 2.9), but they’ll probably spend a little less each month ($98.13 versus $99.15). Purchasing behaviour: frequency and amount Pre-legalization Post-legalization Monthly Difference figures (current) (current and likely)) Average purchase Frequent users +22.30% 2.5 3 .1 frequency $99.05 $98.88 -0.02% Average total spend Three-month Pre-legalization Post-legalization Difference figures (current) (current and likely)) Average purchase Less frequent users 0.6 1.3 +121.00% frequency +67.80% Average total spend $16.61 $ 2 7. 8 7 12

15 | Canadian consumers: demographics and behaviours A society in transition say they’ll consume from one to Don’t expect consumption six times per week, up slightly from levels to change significantly 33 percent today. Canadians may purchase cannabis more often after legalization, but While legalization might not affect it doesn’t seem they’ll indulge in it frequency, it does seem Canadians will all that often. Overall, 41 percent consume a bit more when they do: the of all consumers—and 63 percent average amount consumed during a of probable ones—say they’ll use it single occasion is expected to rise less than once a month. Even among 11 percent, from 0.82g to 0.91g, current consumers, legalization appears perhaps driven by the anticipated likely to drive only a slight increase: popularity of edible products. 20 percent say they’ll consume daily, unchanged from today; 35 percent Consumption behaviour: frequency of use Pre-legalization 20% 33% 24% 23% current users Post-legalization 27% 35% 18% 20% current users Post-legalization 19% 14% 63% 4% likely users 1-6 times per week Less than once a month Daily Daily Once/twice a month Less than once a month 1-6 times per week Once/twice a month 13

16 A society in transition | Channel and purchase preferences Channel and purchase preferences Customers will likely prefer to walk into a store to buy products 14

17 A society in transition | Channel and purchase preferences buying online is understandable, given pproximately half of those the stigma that continues to surround surveyed say they’re interested cannabis consumption; this option in purchasing from government A enables customers to maintain their or licensed private retail stores. privacy, thereby avoiding disclosure to Consumers also expressed interest in friends, family, neighbours, co-workers, buying directly from licensed producers employers, media, and others. or manufacturers, but they will be unable to do so. Our research also Notably, current daily cannabis indicates that almost half (47 percent) of consumers are much more likely all recreational products will be bought to continue purchasing products on from physical locations. the illegal market compared to less frequent consumers (53 percent versus Roughly a third of cannabis consumers 19 percent). Daily consumers today are also interested in buying online are also more likely to grow their own from government retailers and licensed (53 percent, compared to 31 percent private retailers (consumers won’t of less frequent consumers). Those be able to buy online from licensed in Atlantic Canada are also keen producers or manufacturers, either). on growing their own: 44 percent We estimate that 35 percent of products say they’d do so, compared to just will be purchased through these online 27 percent nationwide. and mobile channels. The interest in Preferred legal purchase channel Licensed private retail store 51% Government retail store 50% Direct from a licensed producer/ 48% manufacturer retail store Licensed producer/manufacturer website 33% 30% Licensed private retail website Government-operated website 28% Grow your own 27% 24% Licensed producer/manufacturer mobile app Licensed private retail mobile app 21% Physical Digital Other 15

18 A society in transition | Channel and purchase preferences until a year after dried cannabis and Product variety is also important. Price and product variety will oils make their legal debut, 58 percent Sixty percent of current consumers be key purchase drivers of likely consumers plan to purchase and 49 percent of probable ones What will factor into purchasing and use edibles. While one in three consider the range of available products decisions? For current and probable (34 percent) current consumers say (e.g., edibles, pre-rolls, oils) to be an consumers alike, price is key: 75 percent they’re likely to try new and different important purchasing criterion. Today, of current consumers and 65 percent products, only one in five (20 percent) 64 percent of consumers typically of likely ones say they’ll be looking for of probable future consumers say partake through rolled joints. While products offered at reasonable prices. they’ll do the same. edible products won’t be available 16

19 | Channel and purchase preferences A society in transition Addressing their customers’ concerns Likely consumers appear to be slightly will require companies to implement more interested in the safety and secure supply chains to protect product origin of the product. Fifty percent of quality and integrity. They will also need those surveyed say they’ll be looking to conduct third-party due diligence to for products that have been tested for deter illegal or unethical practices, and pesticides and other harmful materials, implement insider-threat programs to compared to 48 percent of current prevent the infiltration of and influence customers. Respondents aged 55 on the legal cannabis industry by and older are especially concerned organized crime. about this (62 percent), compared to their peers aged 54 and younger (45 percent). As well, 55 percent of probable future consumers want to know their products come from a reputable grower, compared to 47 percent of current ones. Considerations for purchase decisions 75% Offered at a price deemed reasonable 65% Type of cannabis product 60% (e.g. joint, edible) 49% 53% Available in preferred potencies 40% 48% Tested for pesticides and other harmful materials 50% 47% Product of a reputable grower 55% 46% Available in preferred package sizes 36% 34% New and different types of cannabis products 20% 26% Something that has been tried before 15% 19% Available in a preferred package type 17% 15% Familiar brand 16% Current user Likely user 17

20 A society in transition | Channel and purchase preferences Overall, we expect six out of 10 likely There’s a strong appetite Edible products won’t be cannabis customers will choose to for edibles offered for at least a year consume edible products. For current The federal government intends to consumers, edibles could comprise make only fresh or dried cannabis, after legalization, despite 18 percent of their overall intake after limited oils (including capsules), plants, an explosion of interest in legalization, up from 14 percent today. and seeds available upon legalization. Edible products won’t be offered for them in recent years. at least a year afterward, despite an explosion of interest in them in recent years. Nearly two-thirds (64 percent) of current and likely consumers are aware of cannabis-based baked goods, such as brownies, and 51 percent say they’re interested in trying them. Forty-three percent are interested in sampling the chocolate, while 37 percent say they’d eat the hard-candy product. Potential cannabis-based edible products 64% Baked goods/cookies/brownies etc. 51% 35% Chocolate 43% 45% Hard candies, lollipops, or gummies 37% 28% Beverages 31% 15% Honey 25% 10% Popsicles and freezies 24% 9% Ice cream 23% 5% Potato chips 22% 11% Crackers/biscuits 20% 13% Olive oil 19% Interested in using product Have heard of product 18

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22 A society in transition | Channel and purchase preferences ll, ca As we ant r e tail nnabis c onsumers w What Canadians want from Willing to pay more, stores to be located in a safe area, legal retailers but still sensitive to price and also away from schools and other Canadian consumers have high Our research shows that cannabis n 10, t ne i his child-oriented a r eas. F or o consumers expect—and are willing— expectations, and their needs and he mos t is t important c onsideration. behaviours are constantly evolving. Like to pay more after legalization. It’s also It’s also a reminder that while cannabis clear that price is an important factor any other retailer, those selling cannabis will be legalized, it remains a valuable influencing purchasing decisions, will need to meet or exceed those commodity with a strong illegal market. especially for likely consumers. expectations and needs if they intend Retailers, producers, and other cannabis to succeed. i ndustry organizations will need to Current consumers consistently show ensure they prioritize security—both the By far, the most critical feature for y’re more willing to buy at all price p hysical and cyber—and work closely can nabis stores is having staff with points than likely consumers. The price with police services and justice agencies would have to reach nearly $14 or more strong product knowledge: 71 percent to keep themselves, their customers, per gram for half of current consumers of current consumers and 69 percent and society at large protected and safe. to stop buying; for likely consumers, it of likely ones consider this a must-have, would only need to reach roughly $11 while 24 percent overall say it’s the most important consideration. Stores or more per gram. Being responsive By far, the most critical to consumers’ price sensitivities is will also want to have their prices essential if producers, manufacturers, clearly and prominently displayed for all feature for cannabis stores products, which is a mandatory feature and retailers are to be successful—and is having staff with strong if governments are going to persuade a for 70 percent of current consumers product k nowledge. and 69 percent of probable ones. rising number of Canadians to purchase through legal retailers. While cannabis stores will undoubtedly prioritize cyber and physical security, We anticipate that it won’t take long they they will also need to ensure for t he cannabis retail sector to mirror ing s hopping provide the positive, engag the evolution we’ve seen in other retail experience consumers expect and sectors, splitting into discount and demand of any modern retailer. premium segments to meet the needs Fifty-two percent of all customers of very different consumer groups. want to feel welcome upon entering a st ore—this rises to 61 percent for ercent 6 p likely c onsumers—and 4 verall want to be able to easily enter o and leave. For two-thirds (65 percent) of t he s urvey r espondents, c onvenient store hours are also important. This is especially true for current daily consumers, 83 percent of whom say re e ssential. rs a convenient hou 20

23 | Channel and purchase preferences A society in transition Shopping preferences in physical stores Features deemed must-haves by survey respondents 24% 71% Store employees are knowledgeable about products 69% 9% 56% Store is located in a safe area 49% 8% 70% Clearly marked prices for all products 69% 8% 48% Effective visible physical security and cybersecurity 44% 6% Retailer can be trusted with personal data 50% 39% 5% Has convenient hours 65% 65% 4% 55% Made to feel welcome 61% 4% Products are organized and grouped 51% in a way that makes it easy to shop 41% 3% 68% Store is clean and neat 54% 2% Easy to quickly get in and out 51% 37% 2% Visibility and ease of finding items 48% 42% Current user Likely user Most important feature 21

24 | Channel and purchase preferences A society in transition Two-thirds of cannabis consumers also Like the rest of the retail industry, those Free shipping, clear pricing, say clearly marked prices are a must- selling cannabis will find that customers and robust cybersecurity: have feature for prospective online have high expectations about how and vital for online sales retailers. More than half (58 percent) when they get their products. Two- A sizable proportion of cannabis of respondents with a high school thirds of cannabis consumers say free consumers say they would prefer to education or less want to see organized shipping is essential. They’d like speedy buy online from licensed producers product groupings as well, to smooth delivery, too: 63 percent expect their or manufacturers (33 percent), their shopping experience. Daily or purchases to arrive within two days, and licensed private retailers (30 percent), frequent consumers are more likely 34 percent say they’d be willing to pay or government retailers (28 percent) (39 percent) to feel the availability of a higher price for expedited delivery. after legalization—though it won’t accessories—such as pipes, bongs, and Current consumers are more willing be possible to order from producers rolling papers—is necessary, compared (41 percent) to pay for faster delivery or manufacturers at the onset of to those who consume less frequently than likely consumers (27 percent); legalization. (26 percent). respondents aged 54 and younger are twice as likely to pay more for expedited delivery (38 percent) than those aged 55 and older. Online retailers may find that getting pricing right will be a delicate task. 22

25 A society in transition | Channel and purchase preferences in data security and privacy isn’t But what consumers want most surprising, given numerous high-profile from online cannabis retailers is cyber breaches in recent years and privacy and data security. One in five consumers’ understandable desire (22 percent) say that mature, robust to keep their personal and financial data management, privacy protection, information secure. As well, cannabis and cybersecurity for their e-commerce consumers are likely to want to ensure business is the most important feature, their consumption isn’t made public while it’s a must-have for 52 percent because of the potential for personal, of current and 58 percent of likely professional, or reputational damage. consumers. This strong interest Shopping preferences in e-commerce Features deemed must-haves by survey respondents 22% Mature, robust data management, 52% privacy protection and cybersecurity 58% 16% 71% Free shipping 63% 9% 38% Product offered by a trusted organization 45% 9% Site provides detailed/advanced pictures 50% and descriptions of products 46% 6% 54% Wide assortment of products 45% 5% 66% Clearly marked prices for all products 63% 4% 52% Ease of searching/finding products 53% 4% Products are organized and grouped 47% in a way that makes it easy to shop 44% 2% 45% Range of delivery options 44% 2% Real-time inventory or products 47% 36% 2% 51% Wide range of payment options 43% Current user Most important feature Likely user 23

26 A society in transition | Implications and considerations Implications and considerations 24

27 A society in transition | Implications and considerations The federal and provincial/territorial governments are taking a groundbreaking leadership role in making Canada the first G7 country to legalize recreational cannabis nationally. It is a complex effort, and the needs of diverse stakeholders must be delicately balanced. Public safety—from a health, security, and justice perspective—is paramount, of course. At the same time, there’s a strong desire to foster innovation and entrepreneurship across the country and to show the world that a well-regulated, well-run, highly professional cannabis industry can be a positive contributor to a national economy. Governments at all levels will also need And while the federal government, For retailers, legalization represents to establish a strategy to encourage through Health Canada, is committed new opportunities and challenges. the cannabis industry to continue to to tracking legal recreational cannabis Successful retailers will be those who develop in a safe, healthy, secure, well- “from seed to sale,” the plans to date do learn quickly from their counterparts regulated, and professional manner. not include the detailed analytics and in other retail sectors, who have In part, this will involve making a tracking that could provide the system experienced a wrenching evolution in determined effort to reduce the stigma with a springboard. Clarity on this issue recent years as power has shifted to surrounding cannabis consumption to is needed. the consumer. make those who consume—and those who don’t—more comfortable with the It’s also clear that while federal and For all involved in this budding idea. Yet at the same time, they must provincial governments have largely industry, there will be lessons to learn, do so without appearing to actually sorted out their respective roles implications to comprehend, and many encourage consumption itself. and responsibilities, municipalities issues to consider as we embark on the aren’t nearly as ready. Cities are still first step of the legalization journey. coming to grips with such matters as whether to allow people to consume in Government plays a key role in public spaces, where to allow physical ensuring public safety storefronts to set up shop, how to deal Migrating the cannabis trade to legal with cannabis lounges and cannabis- channels offers numerous advantages themed events, and whether justice to the country’s federal and provincial/ agencies have the tools and technology Implications and territorial governments: a regulated required to deal with public safety industry, safer products, investments issues such as cannabis-impaired in justice agencies, improvements in driving, illegal sales, illegal sales to public education and harm reduction, considerations minors, and organized crime. We should and a curb on illegal sales. It also means expect to encounter some bumps along tax revenues. However, given that sales the road after legalization, and trust of cannabis are likely to cut into those of that we will find solutions to them. beer, spirits, wine, and even tobacco, it’s important that governments ascertain the ultimate impact of legalization on so-called sin tax revenues. 25

28 A society in transition | Implications and considerations Our research—and our experience Retail fundamentals will still with traditional players—makes it clear apply: customer insight and data that cannabis retailers must deliver an is critical outstanding and secure experience Deloitte’s perspective is that to if they’re to thrive and, perhaps more succeed, cannabis companies will need important, to attract consumers away to execute today’s retail fundamentals Consistent experiences, from illegal sources. Retailers who just as effectively as those in more make an effort to develop a deep traditional sectors. Consistent and and deep customer understanding of their customers, engaging omnichannel experiences, insights will play a vital and tailor the experience, products, deep insights derived from customer role in ensuring Canadian practices, and prices they provide and retail network analytics, and accordingly, will be well positioned effective security and product integrity cannabis retailers thrive. to succeed. As the industry matures, will be key to ensuring they thrive. retailers will undoubtedly want to As the cannabis industry matures differentiate themselves by moving into and stabilizes, customer experience discount or premium market segments will be of paramount importance. It’s and delivering unique, seamless essential for governments and other experiences in-store and online. stakeholders to support these retailers, because they’re central to the effort to It’s likely retailers and consumers alike eliminate the illegal trade over time. will be somewhat baffled by the wide range of products that will Location, as always, matters. But be available. As we’ve seen, product retailers will need to be sensitive to assortment is important to consumers, the fact that communities may not take and this will be especially true once kindly to an inundation of cannabis edibles arrive on the scene. Retailers stores. Careful attention to customer will need to invest considerable effort segmentation and skilful exploitation into deciding which stock keeping of consumer analytics can help the units (SKUs) to bring in, which will companies optimize their undoubtedly be shaped by their retail networks. customers’ preferences. 26

29 A society in transition | Implications and considerations I t’s also important to note that Security and justice Online channels will need to go vernments at all levels—federal, safeguard privacy and security considerations must not be provincial/territorial, and municipal— overlooked Cannabis retailers’ online channels will will be developing, introducing, and be an important source for consumers Cannabis is a valuable product enacting legislation, regulations, to research and discover products. with a well-established illegal market and by-laws regarding the newly While many will buy from physical and sizable public health and safety legalized market. These new rules will locations, a substantial number of concerns. That means cannabis help ensure that Canada’s licensed people will choose to buy online for organizations at all levels—from producers, distributors, retailers, and the simple reason of privacy. Many regulators to licensed producers and other cannabis organizations do their won’t want to run the risk of being seen retailers—face unique physical and part to help proactively address issues buying cannabis while doing so still has cybersecurity challenges, and all have a related to crime, public safety, and a trace of stigma about it. critical responsibility to protect the end community health. They will also ensure consumer and the public at large. the sector coordinates with relevant This desire for privacy extends to justice agencies and complies with all on line sales. Consumers want to be These new cannabis companies must applicable legislation and regulations. able to trust that their personal and a mu lti-disciplinary, en terprise- adopt financial information, from login wide approach to help identify, assess, credentials to credit card numbers, risks ty and address the dynamic securi are kept very secure—and very to they face. Those that take steps private. Online retailers will need to be implement a full security strategy s tand painstakingly clear about what data to improve their enterprise risk- they collect and why, and how that overall, performance management data will be stored, used, and shared. increase alue, i nstill the organization’s v Cannabis consumers are especially public trust, and achieve an important leery of having their data shared or sold competitive advantage. in such a way that they end up being characterized as a drug user, an unfair It’s vital that cannabis organizations adopt a description for a person consuming a multi-disciplinary, enterprise-wide approach to legal, if controlled, substance. help identify, assess, and address the dynamic Consumers are also concerned security risks they face in both the physical world abo ut the potential for cybersecurity breaches. Given that hardly a week and the online domain. goes by without yet another report of such a breach, this worry is completely understandable. Cybersecurity risk is constantly evolving, and companies all along the cannabis supply chain will need to regularly update their data management and cybersecurity programs to ensure both client privacy and corporate data protection. 27

30 A society in transition n industry poised for growth | A A society in transition, an industry poised for growth The legalization of recreational cannabis will mark an important change in Canadian society. In time, we expect legalization will legitimize consumption and diminish the stigma that surrounds it today. After all, we’ve been here before—and we’ve shown that we have the maturity to develop strong, thriving industries based on tightly regulated, controlled substances such as beer, wine, and spirits. It was not all that long ago that these were regarded in a vastly different light. In our view, cannabis will prove little different. Recreational consumption will eventually become normalized and mainstream, eliciting about as much reaction as having a pint of craft beer. 28

31 A | A n industry poised for growth society in transition It can feel at times that Canada’s cannabis industry is like the Wild West, with new players seeming to emerge every day and the rules by which the industry is meant to operate are not entirely clear. Federal, provincial/territorial, and municipal governments all play important roles in legalizing, securing, and professionalizing the country’s cannabis industry. We encourage organizations all along the supply chain to team with government and respected advisors to strengthen the public trust in a legal cannabis trade, paving the way for a successful new industry in Canada. 29

32 A society in transition | Contacts and endnotes Contacts Tom Peters Jennifer Lee Partner Partner Insights and Analytics Leader National Cannabis Sector Leader Customer Advisory Consumer Advisory & Analytics Practice Leader [email protected] to [email protected] Andrea Ng Mark Whitmore Senior Manager Partner and Vice-Chair Cannabis Retail Lead Global Leader Deloitte Private Retail and Customer Strategy [email protected] [email protected] Rob Patridge John MacLeod Government Transformation Leader Senior Manager [email protected] Market and Consumer Research Customer Advisory Peter Sloly [email protected] Partner National Security and Justice Lead Risk Advisory Special thanks: [email protected] Nicole van Warmerdam Kris Hon Endnotes 1 Uruguay was the first country in the world to legalize recreational cannabis, in July 2017. https://www.nytimes.com/2017/07/19/world/americas/uruguay-legalizes-pot-marijuana.html 2 Privacy-by-design principles. https://www2.deloitte.com/content/dam/Deloitte/ca/Documents/ a-en-ers-privacy-by-design-brochure.PDF risk/c 30

33 A society in transition | Notes Notes 31

34 This page has been intentionally left blank A society in transition | Notes Notes 32

35 This page has been intentionally left blank A society in transition | Section title goes here 33

36 www.deloitte.ca Deloitte provides audit & assurance, consulting, financial advisory, risk advisory, tax and related services to ® public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500 companies through a globally connected network of member firms in more than 150 countries and territories bringing world-class capabilities, insights and service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 264,000 professionals—9,400 of whom are based in Canada—make an impact that matters, please connect with us on LinkedIn , Twitter or Facebook . Deloitte LLP, an Ontario limited liability partnership, is the Canadian member firm of Deloitte Touche ohmatsu Limited. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company T limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche T ohmatsu Limited and its member firms. © Deloitte LLP and affiliated entities. Designed and produced by the Deloitte Design Studio, Canada. 18-5628T

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