Ontario’s first 25 recreational cannabis stores could contribute CA$500 million to industry

Ontario’s first regulated adult-use marijuana retail stores opened their doors Monday – the last province in Canada to achieve the important milestone – but experts say the early entrants will barely scratch the surface of the market’s potential.

The 10 new stores are among the first 25 set to open this month after going through a lottery-selection process.

While the industry welcomed the milestone for Canada’s largest market, entrepreneurs remain in the dark on the province’s plan to expand the 25 selected stores to the 500-plus that experts say are needed to carve out a meaningful share of the illicit market.

Max Mausner, senior analyst at Vantage Asset Management in Toronto, estimates that Ontario could ultimately require 300-900 storefronts to effectively satiate recreational cannabis demand – an estimate he bases on mature U.S. cannabis markets.

“Yes, 25 locations running at full capacity could make a CA$400 million-CA$500 million annual contribution to provincewide sales, but I don’t expect those locations will be able to source enough in-demand product to properly stock their shelves in year one,” he said.

In December, the province cited “severe supply shortages” for its curtailed approach to cannabis retail expansion.

Ontario’s adult-use cannabis market has mostly sputtered since legalization on Oct. 17, 2018, with online-only sales and a very limited selection of consistently-stocked products.

Ontario was the only province to see lower month-over-month sales through January.

However, an uptick in February sales and the limited rollout of retail storefronts this month are signs the industry is on the right track, experts say.

As well, licensed cultivators and provincial wholesalers are ironing out early logistical problems.

Aggressive plan needed

The onus is on the province to create a regulatory framework to capture illicit market share, according to experts such as Omar Khan, vice president of public affairs at Hill+Knowlton Strategies, a Toronto-based consultancy.

“There is no way that consumers will leave the black market if they can’t access legally regulated cannabis conveniently,” he said. “Twenty-five is definitely a drop in the bucket.”

Khan expects the shortage of in-demand cannabis products to be alleviated over the coming months – and even more so when marijuana edibles, extracts and topicals are permitted later this year.

“Ontario needs to move aggressively to increase the number of retail licenses,” he said.

‘Merit-based’ system in works?

The industry is eagerly awaiting information on how the government intends to expand, and many are hoping the province pivots away from the lottery to a merit-based system.

The province remains “committed to moving to an open allocation of licences once we have certainty surrounding the federally regulated cannabis supply. At that point, all regions of the province will have access to as many retail store authorizations as market demand supports,” Ontario Finance Minister said in January.

“I hope that there’s a little more collaboration this time with the industry before the next set of rules come out,” said Darren Bondar, CEO of Alberta-based Inner Spirit Holdings.

Inner Spirit is partnering with Up Cannabis to mark the launch of Kingston’s first retail cannabis store.

The store – 100% owned by Daniel Telio – signed a brand and licensing agreement with Spirit Leaf, which is a 100%-owned subsidiary of Inner Spirit Holdings.

Newstrike Brands and Inner Spirit acquired equity interests in each other last summer and entered into a strategic alliance for the retail distribution of Up Cannabis products.

“If it’s going to be a private model, let it be private and let the industry battle it out,” Bondar said.

The belief is the province will release a new framework by year-end that brings Ontario back to a merit-based approach, said Aaron Salz, founder of the Toronto-based Stoic Advisory consulting firm.

“What I think these (early) stores will do best is help advertise the adult-use program and educate Ontarians on access as there is still a lot of confusion. It really feels like another legalization day, being from Toronto myself.”

Matt Lamers can be reached at mattl@mjbizdaily.com