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How will changes to Ontario’s cannabis retail sector play out?

While Ontario residents were busy celebrating New Year’s, a new regulation took effect, allowing single companies to operate up to 150 recreational cannabis retail stores, double the previous number of 75. With almost 1,800 cannabis Retail Store Authorizations issued, Ontario has the largest retail distribution in Canada by a wide margin, and that of course excludes the   Ontario Cannabis Store’s online sales platform. Changes in Ontario retail affect the whole country, as all licensed producers can potentially sell into Canada’s largest and most valuable market. Much of the speculation about the new policy suggests that there will be further consolidation of the province’s cannabis retail sector. If that’s so, how will this development affect the cannabis industry, particularly independent retailers, and consumers?

Independents are already challenged to compete on price against chains, especially in the value cannabis segment, where the business model is set on delivering your high at the lowest price.  With their economies of scale and broader reach, chains are better positioned to sell at low margins, although that doesn’t necessarily translate into success as the closure of retail chain Fire and Flower attests. 

Tellingly, though, the defunct chain’s 90 stores were acquired by Fika Cannabis, another chain that already operated 22 stores in the province, plus brands Friendly Stranger and Firebird Delivery.

Then too, Canadian retail prices seem to have reached a floor as store numbers have stagnated, making price compression a fact of life for everyone in the business. Low prices and sluggish growth mean tight competition for market share. With broader name recognition and accessibility than independents, chains bring recognizable store brands to the battle, which is important in a marketplace where LPs are hampered in branding their products, thanks to federal advertising and packaging restrictions.

Smaller retailers are also crying foul over alleged data deals where some LPs offer payments for bulk product purchases and preferred placements as part of these arrangements. While buying data is permitted, deals that require proprietary shelf positioning and large inventory buys are not, according to guidelines by the Alcohol and Gaming Commission of Ontario (AGCO). It’s difficult to know how well prohibitions on such inducements are being enforced, however, as complaints persist.

Some industry participants see an opportunity for independents and small chains to offload their assets to larger operations. But consultants brought in to help sell stores report that many owners struggle to find a buyer, and if they sell it’s often at a loss. Of course, stores with strong cashflow in good locations may choose not to sell, but there’s not much preventing a chain from opening nearby to try to muscle them out. Independent specialty stores and small chains with loyal clientele will likely continue in the retail ecosystem but these operators will need to compete by selling products closely matched to their customers’ preferences. “Certain clientele appreciates and, in fact, prefer their independent neighbourhood stores [over larger chains], particularly if they are able to curate their products to meet local demand. However, with all retailers buying from the same wholesaler, differentiating themselves is not always an easy task” according to cannabis consultant, David Wasserman of DW Regulatory Solutions.  

Retail takeovers may not be the only game in town, though. Grocery giant Loblaws is said to be lobbying the Ontario government to allow cannabis sales in supermarkets. My sense is that their gambit won’t succeed in the same way that beer and wine is presently being sold in stores. While beverage alcohol is also a restricted product, it doesn’t carry the same stigma as cannabis, nor is it prohibited from viewing by minors. There may come a day when cannabis is sold more openly—for example, TV ads for online gambling sites are now seen by everyone – but casino gambling and tobacco remain hidden from public view. 

Business consultant and publisher of Cannabis Management Review, Mitchell Osak, remarked in a recent interview that grocery’s business model may be ill-suited to cannabis retail. As Osak noted, you can’t display or merchandise it in-store as you would offer cheese samples. The grocery model is also heavily price-driven, requiring grocers to buy food in bulk and turn it over quickly. Will there be enough wiggle room on prices? Hard to say, Osak admits. There is an option for grocers like Loblaws to get involved, however, with an approach similar to how specialty tobacconists operate. While Loblaws is unable to openly sell specialty tobacco items inside its stores, they are permitted to run adjacent stores under a different corporation with a separate entrance. Provided such an outlet complied with all existing requirements, it could be branded and operated in ways consistent with current legislation. 

In addition to such developments, the Ontario government has shown a willingness to upend retail more generally. During the pandemic it allowed the creation of private bottle shops for wine and beer, and recently announced it will not renew its long-standing agreement with the Beer Store, allowing convenience stores, gas stations, big box outlets and more supermarkets to sell wine and beer and set their own prices. The roles of the Beer Store and LCBO will change, focusing on bottle recycling and wholesale distribution respectively. The LCBO will remain the sole vendor of spirits but will compete with a growing number and widening field of low-alcohol purveyors to include an estimated 8,500 locations. 

Even Service Ontario, the government offices providing motor licences and health cards, is being re-imagined.  On February 3, 2024, six service centres opened in Staples Canada stores and three more are coming later this year. Ontario has already formed retail partnerships with Canadian Tire, IDA, and Home Hardware. The three-year Staples pilot is projected to save $1 million while providing customers expanded parking and longer operating hours. Could this model be adapted for cannabis sales, perhaps in the health products category?

It may be too early to know exactly how changes to cannabis retail will play out, but it’s likely that the sector will look quite different in a few years than it does today. And if these changes lead to stronger sales and a greater share for legal retailers, producers, and government it will be difficult to argue against.  After all, it wasn’t so long ago that one had to fill out a paper slip to purchase beverage alcohol from behind the counter and buy bags of “grass” from illicit dealers. 

Denis Gertler  is a regulatory consultant, board member and former government regulator.