By: Matt Lamers | MJBiz Daily
Ontarioâ€™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 the Alcohol and Gaming Commission of Ontario (AGCO) attempted to clarify its rules on inducements â€“ or â€œslotting feesâ€ â€“ by issuing an update to the Registrarâ€™s Standards for Cannabis Retail Stores â€“ the rules governing legal marijuana stores.
Jennawae Cavion, co-founder and CEO of Calyx + Trichomes in Kingston, said pay-to-play is common in many industries, â€œbut theyâ€™re straight up not allowed in Ontario, and I donâ€™t understand why the AGCO and other provinces donâ€™t do anything about it.â€
â€œItâ€™s a really thin veil,â€ she said.
To get around curbs on slotting fees, industry officials allege, some producers and brands are instead paying cannabis retailers for their sales data to ensure their products get preferential treatment in the Ontario retail market.
The monthly fee can reportedly amount to tens of thousands of dollars or more.
Some industry officials told MJBizDaily that the sales-data workaround falls into a quasi-legal gray area, given that brands and manufacturers arenâ€™t paying directly for prime shelf or display space or exclusive 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 Ontarioâ€™s cannabis regulator.
The cannabis store regulator in Ontario wonâ€™t say whether it has taken any specific action regarding prohibited inducement arrangements between retailers and licensed producers, even though industry sources say so-called pay-for-play deals have become rampant.
â€œWe have received information about concerns in the sector surrounding alleged inducement activities between cannabis retailers and licensed producers,â€ an AGCO spokesperson said via email.
â€œWe can confirm that we are actively monitoring and conducting regulatory activities in a number of areas related to the Standards, including inducements.â€
The AGCO declined to answer MJBizDailyâ€™s questions about the number of complaints it has received.
The regulator also wouldnâ€™t say how many enforcement actions it has taken, if any.
The Ontario Cannabis Store, the provincial wholesaler, directed questions to the AGCO, â€œas this is a regulatory matter.â€
In Ontario, retailers requiring or receiving payments from licensed producers for preferred shelf placement is prohibited.
Harrison Jordan, a Toronto-based lawyer who has assisted dozens of cannabis retailers, shared with MJBizDaily an emailed response from the AGCO to an inquiry about the data-sale policy:
â€œIf the payment for the sales data is based on how much product a store stocks/sells â€“ rather than the value of the data itself â€“ it may not be strictly falling outside the parameters of Standard 6.6, but we would be considering whether it is a material inducement,â€ according to the email.
Standard 6.6 established four prohibitions â€œto ensure that they are not used as a method for material inducements.â€
Jordan said the AGCOâ€™s answer underscores the ambiguity surrounding the data-sale deals.
â€œItâ€™s hard to ensure a level playing field when these types of arrangements arenâ€™t definitively ruled as impermissible,â€ he said.
Independent entrepreneurs in Ontario, such as Paul Thompson of Little Leaf Cannabis Co. in Stratford, say itâ€™s tough to compete fairly because the data revenue allows large corporate chains to sell marijuana below cost.
He said heâ€™s spoken with a number of smaller LPs that are open to the â€œno data dealâ€ conversation.
â€œThereâ€™s a movement starting, where LPs and retailers are pledging to not do data deals,â€ Thompson said.
â€œI shouldnâ€™t have to pay you to sell weed. It just seems crazy.
â€œGood weed will sell itself. And I think thatâ€™s where some of these large corporations canâ€™t compete â€“ they just donâ€™t have good weed.â€
Can AGCO sell data?
Some entrepreneurs have told MJBizDaily that pay-to-play deals give an advantage to large companies at the expense of independently owned stores.
â€œ(Retail chains) are using a second stream of income thatâ€™s allowing them to sell (cannabis) products at a loss,â€ said Mike Ainsworth, owner of Kellyâ€™s Cannabis, an independently owned store in Huntsville.
â€œHow is anybody expected to compete with that when they have one or two stores?â€
â€œTheyâ€™re using the millions of dollars theyâ€™re getting in data sales to subsidize their operation costs, which then allows them to sell product cheaper than any independent store in Ontario,â€ 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.
â€œIf itâ€™s in black and white that itâ€™s against the rules, then why was this not stopped yesterday?â€ he asked.
Ainsworth suggested that the AGCO could sell consumer data to producers, rather than stores selling the data themselves.
â€œThe AGCO and OCS own all that information, so anonymize it, sell it to the LPs, and take the money,â€ he said.
â€œIt levels the playing field and everybodyâ€™s happy â€“ if itâ€™s all about data sales and itâ€™s not about millions of dollars falling under the table.â€
Ainsworth also alleged that some brands skirted the material-inducements rule by overpaying for accessories:
â€œA guy will walk into your store and say, â€˜How much is that bong, CA$70? Why donâ€™t I pay you CA$7,000 for it? And thereâ€™s no way for the AGCO to audit that, and I know that has happened.â€
He also said licensed producers, or agencies representing them, have bought significant amounts of gift cards and then intentionally destroyed them in front of the store owner.
Michaela Freedman, an international marijuana business consultant and founder of Toronto-based MF Cannabis Consulting, said some companies are being taken advantage of because there is no transparency or standardized rules governing pay-to-play, pushing the deals into the shadows.
One retailer, whom she declined to name, was charging different slotting fees to different companies â€“ 200 Canadian dollars ($147) per SKU versus CA$50 per SKU.
Freedman wants more clarity.
â€œI think it would be better relative to what we have now if they were to say these standards need to be put in place, then maybe fewer companies would be taken advantage of,â€ she said.
A lack of clear rules for everyone creates an uneven playing field, Freedman added.
Jordan, the Toronto-based lawyer, said he believes itâ€™s possible to have clearer rules.
â€œWhy even have a material-inducements policy if this stuff is going to go on regardless?â€ he asked. â€œI think the intent behind not allowing material inducements is sound.
â€œI 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.â€
According to Standard 6.6, agreements between retailers and LPs must not â€œdefine the amount of product from the licensed producer or its affiliates that must be offered for sale at the retail store.â€
Jordan said data agreements heâ€™s seen do not define an amount of product that must be sold or displayed.
Rather, he said, theyâ€™re simply saying, â€œâ€˜If you sell 10 of our XYZ product, weâ€™ll give you CA$5 per product that you sell, which could be argued to be in the gray area.â€
â€œIt would beg the question,â€ Jordan said, â€œWhy did they go through with this rigmarole of reining material inducements in, if weâ€™re just going to say that this kind of material inducement, which is happening, is still allowed?â€
Slotting fees not sustainable
Cavion of Calyx + Trichomes said the data-sale deals arenâ€™t sustainable.
She said some retailers are pushed into accepting data-sale arrangements because theyâ€™re desperate for cash.
â€œThatâ€™s what makes some of these deals tempting, is some of them are for products I would be selling anyway,â€ she said.
â€œMost kickback deals are in the 8%-10% range, and Iâ€™ve seen them as 2%-3%. The more core the product, the lower the discount that is available,â€ she said.
Cavion said the data deals are an advantage to large corporations, because independents have less volume.
â€œBig companies have an advantage because they can buy hundreds of cases and move their inventory around if they need to, but I donâ€™t really have that ability as much,â€ she said.
â€œIt doesnâ€™t make sense for them to deal with me, an independent, because Iâ€™m such a small fish compared to a chain (of stores).
â€œAnd I have much less buying power, even though I have a busy and successful store.â€