Cannabis company Hexo Corp. is moving to undercut prices in the illicit market with a new 28-gram product that costs consumers as much as one dollar less per gram than at the average illegal dispensary.
The product, under the brand Original Stash, which will be on sale in Quebec cannabis stores starting Thursday for $125.70, or $4.49 per gram, including taxes, the company said.
That's cheaper than the average cost of a gram of cannabis at $7.37 per gram during the third quarter, with the price of legal and illegal weed at $10.23 and $5.59 per gram, respectively, according to the latest Statistics Canada analysis of crowdsourced data.
Hexo is targeting the roughly half of Canadians who -- one year after the legalization of recreational pot -- are still buying weed from the illicit market, its chief executive Sebastien St-Louis said.
"That 51 per cent of Canadians that buys 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," he said in an interview.
He said Hexo is able to offer a one ounce, or 28 gram, product at this relatively low price point for various reasons, such as less packaging needed for the bulk size rather than individual packaging for each gram or 3.5 gram product. St. Louis added that the licensed producer increased its production scale and lower hydroelectric costs in Quebec also allow the company to reduce its price.
Hexo worked with Quebec's provincial cannabis corporation on this pricing strategy and it will be on sale exclusively at its shops starting tomorrow.
The company is currently working with entities in other provinces, such as Ontario and Alberta, to do a similar low-cost product.
Canada legalized recreational cannabis on Oct. 17 last year, making it the first G7 country and the second country in the world to take that landmark step.
Once the initial product shortages and supply chain bottlenecks eased, legal cannabis sales in Canada have grown but a large proportion of buyers continue to turn to illegal sources for pot.
In the second quarter, household expenditures on cannabis at licensed retailers was $443 million, up from $172 million in fourth quarter of 2018, according to Statistics Canada. But pot expenditures at unlicensed retailers amounted to $918 million, down from $1.17 billion in the fourth quarter of last year.
When deciding where to buy cannabis, 76 per cent of Canadians who consumed pot in the first half of the year cited quality and safety as an important consideration while 42 per cent mainly considered price, according to Statistics Canada survey results released in August.
St. Louis said that the cannabis used in its Original Stash products are only low price, but not low quality.
"This is high-quality cannabis flower, it has more THC than what's available on the black market," he said, noting that it has between 12 and 18 per cent tetrahydrocannabinol, the compound that produces a high.
He added that it is not a loss leader, but would not talk about specific margins until Hexo reports its earnings on Oct. 24.
When asked about a potential price war among other large-scale producers, as signs of pricing pressure emerge, St. Louis said he was not concerned.
"It's not much of a war, if the other side has no chance," he said. "Most of the other licensed producers don't have the cost structure that Hexo does."
He also noted that with capital drying up in the broader market, most of the production facilities underway "will never get finished," he said.
The product launch comes after Hexo lowered its net revenues forecast for its upcoming fourth-quarter ended July 31, and it withdrew its $400 million net revenue guidance for its 2020 financial year.
St. Louis said more details on its guidance would be provided during its upcoming earnings, but said the decision to pull back stemmed from the uncertainty facing the cannabis industry. He expects that this low-cost product will be a key part of its strategy to reach 20-plus per cent market share in the coming years and ramp up its revenues.
"We're very bullish on Original Stash, how its going to perform. But we'll monitor it," he said. "We didn't want to be in a situation to commit to specifics in this unsure industry."