Ontario cannabis store regulator under pressure over alleged “pay-to-play” deals

cannabis in a glass jar in close up photography
Jennawae Cavion, co-founder and CEO of Calyx + Trichomes in Kingston, said pay-to-play is common in many industries, "but they're straight up not allowed in Ontario, and I don't understand why the AGCO and other provinces don't do anything about it." "It's a really thin veil," she said.

Matt Lamers | MJBiz Daily

Ontario’s cannabis store regulator is facing calls to crack down on alleged pay-to-play schemes that some industry executives say allow larger marijuana producers and brands to secure shelf space for their products and other special treatment from retailers.

Industry executives say the problem ballooned earlier this year after theAlcohol and Gaming Commission of Ontario (AGCO) attempted to clarify its ruleson inducements or slotting fees by issuing an update to the RegistrarsStandards for Cannabis Retail Stores the rules governing legal marijuanastores.

Jennawae Cavion, co-founder and CEO of Calyx + Trichomes in Kingston, said “pay-to-play” is common in many industries, but they’re straight up not allowed in Ontario, and I don’t understand why the AGCO and other provinces don’t do anything about it.  Its a really thin veil,” she said.

To get around curbs on slotting fees, industry officials allege, someproducers and brands are instead paying cannabis retailers for their sales datato ensure their products get preferential treatment in the Ontario retailmarket.

The monthly fee can reportedly amount to tens of thousands of dollars ormore.

Some industry officials told MJBizDaily that thesales-data workaround falls into a quasi-legal gray area, given that brands andmanufacturers aren’t paying directly for prime shelf or display space orexclusive sales deals involving their product.

At the same time, however, some licensed producers and retailers say many of the data-fee agreements that have become widespread are effectively slotting fees, where brands are paying to play, which is technically not allowed by Ontario’s cannabis regulator.

AGCO silent 

The cannabis store regulator in Ontario won’t say whether it has taken anyspecific action regarding prohibited inducement arrangements between retailersand licensed producers, even though industry sources say so-called pay-for-playdeals have become rampant.

We have received information about concerns in the sector surroundingalleged inducement activities between cannabis retailers and licensedproducers, an AGCO spokesperson said via email.

“We can confirm that we are actively monitoring and conducting regulatory activities in a number of areas related to the Standards, including inducements.”

The AGCO declined to answer MJBizDaily’s questions aboutthe number of complaints it has received.

The regulator also wouldn’t say how many enforcement actions it has taken,if any.

The Ontario Cannabis Store, the provincial wholesaler, directed questions tothe AGCO, as this is a regulatory matter.

In Ontario, retailers requiring or receiving payments from licensedproducers for preferred shelf placement is prohibited.

Harrison Jordan, a Toronto-based lawyer who has assisted dozens of cannabisretailers, shared with MJBizDaily an emailed response fromthe AGCO to an inquiry about the data-sale policy:

“If the payment for the sales data is based on how much product a storestocks/sells rather than the value of the data itself it may not be strictlyfalling outside the parameters of Standard 6.6, but we would be consideringwhether it is a material inducement, according to the email.

Standard 6.6 established four prohibitions to ensure that they are not usedas a method for material inducements.”

Jordan said “the AGCOs answer underscores the ambiguity surrounding thedata-sale deals.

Its hard to ensure a level playing field when these types of arrangements aren’tdefinitively ruled as impermissible,” he said.

Independent entrepreneurs in Ontario, such as Paul Thompson of Little Leaf Cannabis Co. in Stratford, say its tough to compete fairly because the data revenue allows large corporate chains to sell marijuana below cost.

He said he’s spoken with a number of smaller LPs that are open to the no data deal conversation.

“Theres a movement starting, where LPs and retailers are pledging to not do data deals,” Thompson said.

“I shouldn’t have to pay you to sell weed. It just seems crazy.

Good weed will sell itself. And I think that’s where some of these large corporations can’t compete, they just don’t have good weed.”

Can AGCO sell data?

Some entrepreneurs have told MJBizDaily that pay-to-playdeals give an advantage to large companies at the expense of independentlyowned stores.

(Retail chains) are using a second stream of income that’s allowing them to sell (cannabis) products at a loss, said Mike Ainsworth, owner of Kelly’s Cannabis, an independently owned store in Huntsville.

“How is anybody expected to compete with that when they have one or twostores?

They’re using the millions of dollars they’re getting in data sales to subsidize their operation costs, which then allows them to sell product cheaper than any independent store in Ontario, he said.”

Ainsworth warned that such data-sale schemes could potentially force hundreds of independent stores out of business.

He wants the AGCO to enforce its rules.

“If its in black and white that its against the rules, then why was this not stopped yesterday?” he asked.

Ainsworth suggested that the AGCO could sell consumer data to producers, rather than stores selling the data themselves.

“The AGCO and OCS own all that information, so anonymize it, sell it to theLPs, and take the money,” he said.

“It levels the playing field and everybody’s happy if its all about datasales and its not about millions of dollars falling under the table.”

Ainsworth also alleged that some brands skirted the material-inducementsrule by overpaying for accessories:

“A guy will walk into your store and say, how much is that bong, CA$70? Why don’tI pay you CA$7,000 for it? And there’s no way for the AGCO to audit that, and Iknow that has happened.”

He also said licensed producers, or agencies representing them, have boughtsignificant amounts of gift cards and then intentionally destroyed them infront of the store owner.

Unclear rules

Michaela Freedman, an international marijuana business consultant andfounder of Toronto-based MF Cannabis Consulting, said some companies are beingtaken advantage of because there is no transparency or standardized rulesgoverning pay-to-play, pushing the deals into the shadows.

One retailer, whom she declined to name, was charging different slotting fees to different companies 200 Canadian dollars ($147) per SKU versus CA$50 per SKU.

Freedman wants more clarity.

“I think it would be better relative to what we have now if they were to saythese standards need to be put in place, then maybe fewer companies would betaken advantage of,” she said.

“A lack of clear rules for everyone creates an uneven playing field,” Freedman added.

Jordan, the Toronto-based lawyer, said he believes its possible to haveclearer rules.

“Why even have a material-inducements policy if this stuff is going to go on regardless?” he asked.  “I think the intent behind not allowing material inducements is sound. I do think there is a fair argument, maybe not the most friendly to mom-and-pop shops, but there is an argument that can be made to just allow them, to just regulate them, as opposed to prohibit them.”
According to Standard 6.6, agreements between retailers and LPs must not define the amount of product from the licensed producer or its affiliates that must be offered for sale at the retail store.

Jordan said data agreements he’s seen do not define an amount of productthat must be sold or displayed.

“Rather,” he said, “they’re simply saying, if you sell 10 of our XYZproduct, well give you CA$5 per product that you sell, which could be argued tobe in the gray area.”

It would beg the question, Jordan said, “why did they go through with thisrigmarole of reining material inducements in, if were just going to say thatthis kind of material inducement, which is happening, is still allowed?”

Slotting fees not sustainable

Cavion of Calyx + Trichomes said the data-sale deals aren’t sustainable.

She said “some retailers are pushed into accepting data-sale arrangements because they’re desperate for cash.  That’s what makes some of these deals tempting, is some of them are for products I would be selling anyway,” she said.“ Most kickback deals are in the 8%-10% range, and I’ve seen them as low as 2%-3%. The more core the product, the lower the discount that is available,” she said.

Cavion said “the data deals are an advantage to large corporations, because independents have less volume. Big companies have an advantage because they can buy hundreds of cases and move their inventory around if they need to, but I don’t really have that ability as much,” she said.“It doesn’t make sense for them to deal with me, an independent, because I’m such a small fish compared to a chain (of stores).  And I have much less buying power, even though I have a busy and successful store.”

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