Hexo launches discount cannabis brand to combat black market

Gatineau-based licensed producer Hexo Corp. is taking direct aim at the illegal cannabis market with a new bulk brand specifically targeting cost-conscious users.

The value brand, Original Stash, was created with the specific goal of disrupting the black market, says Hexo’s CEO and co-founder Sebastien St-Louis. The first product is being sold exclusively in SQDC retail stores in Quebec at a price of $125.70 for 28 grams, with other Canadian markets to follow.

“We’re now competing directly with the illicit market and providing consumers with an affordable, controlled, quality product,” said St-Louis in a release announcing the new product.

A report from BNN Bloomberg, quoting a research note from Jefferies Group analyst Owen Bennett, says that Original Stash’s per gram rate of $4.49 is 50% below the national average for legal cannabis and 20% below the black market rate.

In an interview with the CBC, St-Louis explained that Hexo is able to offer a discounted price because its bulk product requires less packaging than standard one gram packages, and because it has boosted production. He also said that Hexo benefits from Quebec’s lower energy costs.

But Bennet’s research note states that the product launch was likely driven by “poor sell-through” of Hexo’s  current products, noting that the company’s performance has been lacklustre outside its native Quebec. The launch of Original Stash, he surmised, is likely aimed at addressing limited customer demand and increasing Hexo’s market share.

Earlier this month, Hexo announced that its Q4 revenue would be lower than expected and that it was withdrawing its 2020 outlook, citing slow retail store rollout, government delays on approving cannabis derivative products, and “early signs of pricing pressure.”

“While we are disappointed with these results, we are making significant changes to our sales and operations strategy to drive future results,” said St-Louis, at the time. Hexo certainly isn’t alone among cannabis players, with many others expressing frustration and disappointment in the legalized cannabis market one year after launching.

Hexo, though, is playing itself up as something of a green knight—coming to the aid of consumers who might be unaware of the legality of the products they’re buying, with St-Louis noting that it is “increasingly difficult” for consumers to distinguish between legal and illegal products.

Illegal distributors, he said, have even gone as far as including mandated Health Canada warnings and THC disclaimers on their packaging. “Illegal cannabis websites are well built, allow consumers to purchase online, and products are delivered to their doors,” he said. “But we know that illegal cannabis products can—and often [do]—contain heavy metals, pesticides, and other contaminants, and that concerns me deeply.”

According to Statistics Canada’s most recent National Cannabis Survey, about 40% of the country’s cannabis users continue to purchase from the black market, with price being the primary reason.

A study of 2,347 Canadians conducted by Abacus Data on behalf of Hexo also shows a large percentage of cannabis consumers are knowingly buying their product on the cheaper black market. According to Abacus, 25% of all Canadians have bought cannabis since legalization, with 53% of those admitting to buying from an illegal provider (though 20% of that group say they did not know it was illegal to purchase from an unlicensed provider).

“Less than half of Canadians are currently shopping legally,” St-Louis told BNN. “With [Original Stash], we think that really doubles the available market and it really matches the additional capacity that Hexo’s put online in the last year.”

Aside from the significant number of consumers who said they were unaware of the illegality of purchasing from an unlicensed provider, 30% of people who admitted to purchasing cannabis edibles, beverages or topicals in the wake of legalization said they did not know the products were not yet legal in Canada. Edibles and other cannabis derivatives were legalized this week, but are not expected to be in market until later this year.

“Our aim with Original Stash is to disrupt the illicit market, educate consumers about the value of a regulated and tested product, and drive them to purchase their cannabis legally,” said St-Louis.


Chris Powell