Cannabis recalls, and returns are costing producers millions

Published Mar 16, 2020 09:00 a.m. ET
iStock / MysteryShot

The cannabis industry is facing million-dollar deficit issues, and its leaders are pointing the finger at recalled and returned product as being the culprit. The financial impact of millions of dollars’ worth of potential cannabis sales returned is unacceptable to the licensed producers, and it weighs heavy on the cannabis industry bank accounts.

Some of the main reasons for product recall include safety concerns. Product recall action is expensive in the cannabis industry as it is in any manufacturing business. Potential lawsuits are exposed, and hefty fines are potentially executed. The reputation of the cannabis producer can become tarnished and pose a threat to future cannabis sales.

Some of the issues surrounding the return of the product include mold and labeling as part of the problem. Allen Rewak, the executive director from the Cannabis Canada Council, suggests that the identifying of these problems ensures that the overall federal health's regulatory departments are effectively working.

Currently, federal cannabis license and permit holders who are subject to these regulations include:

  • Sales
  • Cannabis cultivation (nurseries, micro, and standard)
  • Research
  • Export (hemp, research and medical)
  • Import (hemp, research and medical)
  • Analytical testing
  • Processor

Liability insurance

Product recalls are presenting in higher monetary payouts for the cannabis industry due to the need for additions to the Product Liability Insurance, which is often referred to as Products & Completed Operations Liability. Companies need to ensure that the policy includes coverage for product recall.

The Product Recall Insurance is a required additional coverage to your cannabis companies' insurance, as it’s meant to fill the missing gap of coverage for recalls. This addition to the standard Commercial General Liability (CGL) policy is necessary to remain in compliance with the  B.C. and Ontario requirements.

When a recall is issued, it can result in thousands of items being removed from the shelves. Cannabis sales can be affected drastically when the recall is specific to tampering or contamination. The product needs to be replaced, or money refunded, costing millions in cannabis sales for the company.

Companies battling recalls have to use the best PR and spend more cash on marketing to fight the negative attention of the mistake.  The whole experience is a highly expensive journey that can end up costing millions of dollars to the cannabis cultivator in revenue, and eventually, the cannabis industry can suffer on all levels. Recalls have even resulted in the suspension of sales licenses to some companies.

  • Bonify Medical Cannabis fell into this category when Health Canada found that the company had breached the terms of the Cannabis act. The company was found to have sourced and sold cannabis from illegal sources.

  • CannTrust also laid off close to two hundred workers due to regulatory problems within the company. Further investigation by the federal regulator’s departments determined that the company was growing cannabis in unlicensed rooms. Recalls and returns cost the company substantial amounts of cash.

  • Canopy Growth Corp reported that the company had a $26.9 million problem. 20.5 million dollars of the product was being returned from provincial retailers, and another loss of $6.4million was on the horizon.

The highly regulated legal cannabis industry and market in Canada hold market players to high standards. Those in the cannabis industry who fall under the microscope of regulations from Health Canada are left to deal with the added costs of ensuring that recalls and returns are not part of their journey in the cannabis space.

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