When Canada became the first major country to allow adult-use cannabis sales in October 2018, analysts and investors alike projected major numbers. Deloitte Touche Tohmatsu Limited predicted Canadians would purchase $4.34 billion in the first year of legal marijuana sales.

As it turns out, that projection was quite off. Statistics Canada reported non-medical cannabis sales hit $1.2 billion in the first full calendar year.

Not everyone was surprised by Canada’s first-year numbers. It’s a pattern similar to what happened in U.S. recreational states like California, Colorado and Oregon, said Jessica Lukas, senior vice president of commercial development at the cannabis research company, BDSA. “It’s interesting when we’re all surprised that a market doesn’t perform as well as we think it will—after seeing every single market not perform as well as we thought it would the first year,” she added.

Jonathan Havens, a partner at Saul Ewing Arnstein & Lehr LLP who has worked on a number of deals involving U.S. cannabis companies going public in Canada, agrees that it can be difficult to predict the shape early cannabis markets will take. This is especially true when regulations vary state-to-state, as in the U.S. or province-to-province, as in Canada. “Knowing the rules versus how they’re rolled out and seeing how consumers respond to them can be challenging,” he said.

Pablo Zuanic, a cannabis analyst at Cantor Fitzgerald, said the data suggest Canada’s rollout was a bit behind other recreational markets. In a recent research note, Zuanic wrote that Canada’s per-capita sales were “less than half” where Colorado was after 14 months of legalization. At that point, Canada’s market was about C$45 (US$33) per person, whereas Colorado was at C$97 per person 14 months into its adult-use cannabis program.

While a period of adjustment is typical, there were some unique aspects of Canada’s marijuana launch that caused unnecessary problems. This information might prove useful for the U.S. to consider if—or when—marijuana is legalized.

Problem No. 1: Lack of Retail

One of the most commonly cited reasons for lower-than-expected revenues has been a lack of brick-and-mortar retail locations. While cannabis was legalized on the federal level, each province dealt with the issue of retail licenses differently. Some only allowed for government-run dispensaries, some allowed independent operators and others allowed for chains or multi-license holders.

It’s very similar to how licenses have been issued in recreational marijuana states in the U.S.: No two programs are exactly the same.

About 35% of adult Canadians are currently consuming cannabis, and more than 40% of non-consumers are accepting of it.

“You look at shoppers’ access to retail province-by-province, and in some cases it’s very, very limited,” said Lukas, noting this is something seen in Illinois and Massachusetts as well. “Some provinces were slower to release licenses to allow retail locations to open.”

Ontario provides a clear example of the lack of access. In Canada’s most populous province, retail licenses were awarded by lottery and capped at 24 dispensaries for a population of 14.5 million.

Analysis by Stifel Financial Corp. showed that at the end of 2019, 76% of the Canadian population had one cannabis store per 300,000 people. By comparison, in Colorado there is one store for every 10,000 people. That means that many consumers in Canada not only have to travel long distances to access a dispensary but also are potentially facing massive lines once they arrive.

“Especially in the early days, weeks and even months, long lines out the doors of dispensaries are common,” Havens said, adding that there have been similar lines in markets like Illinois after the start of the state’s adult-use program. “Long lines around the block are not unique to Canada.”

One aspect that is unique to Canada: The country launched its adult-use cannabis program with online—not retail—sales. Instead of visiting a brick-and-mortar dispensary, early Canadian marijuana shoppers had to place orders online to be delivered via mail. This is not something recreational marijuana states have done, though Lukas pointed out that Canada’s medical marijuana market was largely mail order.

The move proved problematic for consumers, who appear to prefer an in-person marijuana shopping experience. As more dispensaries opened, sales in Canada grew. It’s a promising sign for offline retailers in the United States who hope to one day benefit from a recreational marijuana market.

“One of the things that’s interesting—but not surprising when you think about it—is why people are going to dispensaries rather than opting for delivery,” Havens said. “Particularly early on in medical markets, there are a lot of people who need or want that educational experience, want to be guided, want to learn best practices from dispensary personnel, including clinical directors.”

Problem No. 2: Lack of Forms

A slow rollout of retail locations is not particularly unique to Canada, but how the country regulated different forms of marijuana certainly was. For the first year-plus of Canada’s cannabis program, only certain types of marijuana were allowed to be sold. Specifically, only flower (including pre-rolls), oils, capsules, seeds and plants were permitted to be sold until 2020.

This kind of limited form rollout is possible, perhaps even likely, if marijuana is legalized federally due to the position of the U.S. Food and Drug Administration (FDA).

Havens, who formerly worked as a regulatory counsel for the FDA, addressed the agency’s stance on CBD in ingestible products—that it is technically impermissible—but quickly noted that, to date, the FDA has not taken any CBD-related enforcement absent very aggressive therapeutic claims being made about products (e.g., COVID-19, cancer, AIDS, diabetes, etc.). If and when marijuana is legalized federally, it is possible that THC ingestibles could face a similar FDA hurdle.

The situation in Canada provides a clear picture of the demand for a large variety of products. Vape pens, edibles and topical marijuana became legal in October 2019 and hit retail stores in early 2020, part of “Cannabis 2.0.” New Leaf Data Services predicts the 2.0 forms will grow the Canadian cannabis market by 30% to 40%, since they are more accessible for new cannabis users who might not be comfortable with smoking marijuana.

Even for experienced cannabis users, a variety of options is desirable for different occasions. “There’s a lot of cross-consumption that drives growth because now you have people buying more for all the different need states,” Lukas said.

Problem No. 3: Black Market

A lack of retail locations combined with a lack of product forms can lead to a thriving black market, another major problem for Canada’s first-year marijuana market.

Rade Kovacevic, president of Canopy Growth Corp., explicitly blamed these issues for his company’s performance and dropping stock price. “Lack of continuity of points of purchase across the country slowed the transition from the black market to the legal market,” he told the BBC. Statistics Canada estimates that currently, 75% of Canadian marijuana sales happen on the black market.

To be fair, black market sales are still a huge problem in markets with ample retail and product for sale. The cost difference between legal, taxable marijuana and marijuana on the black market is frequently significant enough to give consumers pause. Between October 2018 and July 2019, legal marijuana prices rose from C$9.82 per gram to C$10.65 per gram; during that same time frame, Statistics Canada estimates black market prices fell from C$6.51 per gram to C$5.93 per gram.

“To state the very obvious, it’s a lot more expensive to operate in a compliant fashion than to be a drug dealer,” Havens explained. “Compliant businesses are paying taxes (without being able to take all ordinary business deductions), applying for and maintaining licensure, offering competitive employee pay and benefits—the list goes on.”

Recent examples would suggest moving those illicit marijuana sales to legal outlets simply takes time—a lot of it. “In states like Colorado, we have, over time, seen the negative impact to the illicit market because of the legal market,” said Lukas. “But it doesn’t happen overnight.”

BDSA predicts that by 2024, 17.4% of Colorado marijuana purchases will still be on the black market. That’s 10 years after legalization. “Until the cost is the same, you will lose some customers to illicit sources,” Havens said. “However, the investment in the products that are being sold, processed and dispensed in state-regulated programs is incredible. Product testing, myriad other safety and quality controls and research and development all distinguish regulated product from illicit product.

Hope on the Horizon

Likewise, Lukas and others see lots to be excited about in Canada. “Over time, you start appealing to people who never would have consumed or bought illicitly anyway,” she said.

BDSA has been tracking both adoption and acceptance (consumers who do not use cannabis but are accepting of those who do) in Canada since before legalization passed. Lukas and her team have observed “significant growth” in both areas. About 35% of adult Canadians are currently consuming cannabis, and more than 40% of non-consumers are accepting of it.

“That’s grown 10 percentage points in a year,” Lukas said. A 10-point growth in a single year is much faster than the acceptance and adoption rates seen in early recreational states: It took Colorado three years to grow its consumption rate from 25% to 40%.

Lukas said the products, technology and investments in marijuana have all grown significantly from when Colorado first went legal. “Markets that turn on now gain greater acceptance faster,” she said.

Those new adopters are boosting sales, as are more retail locations and product formats. Canada closed out 2019 with an 8.1% increase in recreational marijuana sales in December, marking three straight months of growth, according to Statistics Canada data.

All of which leave four simple takeaways for those hoping to one day follow in Canada’s cannabis footsteps:

1. Cannabis consumers want easily accessible retail locations
2. Cannabis consumers—both new and experienced—want a variety of formats
3. The black market doesn’t go away overnight
4. Be patient: It takes time to develop a successful, adult-use marijuana market.

Or as Lukas put it, “it’s not surprising to see the light turn on and things don’t happen immediately.”