Retail shakeout expected as Ontario heads toward 1,000 cannabis stores

An Ontario marijuana store with an "opening soon" sign

A sign on a Miss Jones cannabis store in St. Catharines, Ontario, says the location is "opening soon." The public comment period for the store ended almost one year ago, according to the AGCO website. (Photo by Matt Lamers)

Ontario is projected to reach 1,000 licensed marijuana retailers by the end of this summer, marking a key growth milestone in Canada’s largest provincial cannabis market.

That rapid market expansion, however, could lead to a thinning of the herd, with a number of Ontario store operators telling MJBizDaily they expect a significant shakeout among retailers.

Ontario was initially a laggard in cannabis store rollouts but recently overtook Alberta to become home to the most marijuana retailers of any Canadian jurisdiction, commensurate with the province’s population of nearly 15 million.

In a recent presentation to retailers shared with MJBizDaily by an attendee, the Ontario Cannabis Store (OCS), a government-owned wholesale monopoly that supplies private retail outlets, said it “(remains) committed to opening 1,000+ retailers by Sept. 1” despite the complications of COVID-19 lockdowns.

The Alcohol and Gaming Commission of Ontario (AGCO), the regulator that licenses those stores, confirmed that it “anticipates that 1,000 RSAs (retail store authorizations) will be issued by Sept. 1.”

The AGCO website listed more than 760 such authorizations as of Thursday.

“I would say by the end of summer, you’re going to see shops in very saturated environments close down rapidly,” said Katy Perry, founder and CEO of Ontario retailer Toke Cannabis.

“The market’s just not big enough to support them all, it’s just not.

“There’s a lot of people that want to test the waters of cannabis retail, and I think that they’re in for a rude awakening.”

Fears of oversaturation

Cannabis retailer Island Smoke in Trenton was the first licensed marijuana store in the area when it opened last September.

“Our business was excellent when we first opened, just because of that,” owner Mark Phillips said.

Now, up to four more cannabis stores are due to open in the community.

“There’s one liquor store in my town – they’re not going to open five liquor stores in my town, because the amount of people in this town can’t support five liquor stores,” Phillips said.

He fears the proliferation of cannabis stores will be unsustainable and expects his impending competition to compete aggressively on price, reducing his profit margin.

“It’s impossible for this many stores to all sell to the small market that we have here and remain profitable,” Phillips said.

With the AGCO licensing as many as 120 marijuana stores per month, early expectations of easy money in a restricted market might be diminishing.

“I think a lot of the people that jumped in early basically thought they could throw a dart at a map, wherever there aren’t pins on the map, and they would do well,” said Stephen Verbeek, president and CEO of Ontario retailer Hello Cannabis.

“There was not a lot of strategic planning with respect to locations. And, obviously, sales projections were exponentially larger than the reality of the situation for many new entrants.”

Retail opportunities still exist, despite challenges

Some new retail opportunities might open up in Ontario municipalities that prohibited licensed cannabis stores at first but are now reconsidering, such as the heavily populated Toronto suburb of Mississauga.

In Scarborough, a major suburban district on the opposite side of Toronto from Mississauga, Stok’d Cannabis co-owner Lisa Bigioni said she sees some opportunities in pockets of the community.

Still, Bigioni warned that retailers who want to open in those areas must contend with local challenges such as a tight commercial real estate market and a large number of schools, which prevent cannabis stores from opening within a 150-meter buffer zone.

“I think we can sustain these stores, possibly a few more,” Bigioni said. “It’s just, where would you put them?”

Hello Cannabis’ Verbeek expects that some stores will never open.

“I think no less than 25% of the applications that we are seeing aren’t even going to get to the stage where they’re opening their doors,” he said.

“Every single day, I am being solicited by people that have run out of money, with stores that are half under construction that could have been opened four months ago.”

Krista Raymer, co-founder of Toronto-based cannabis retail consultancy Vetrina Group, also anticipates that some would-be retailers will rethink their plans.

“I know that the OCS wants to see 1,000 stores by September,” she said, “but I don’t know if that necessarily will be how it plays out in the free market, with retailers being able to make the decision about when they open.”

Separating winners from losers

Players in the Ontario retail market offered a variety of theories on what might make the difference between staying in business and shutting down as competition ramps up.

“I think in the next year, winning stores will be able to control their expenses as well as maintain cash flow,” Raymer said.

Controlling expensive staff turnover will be key, she added, as well as maintaining sustainable inventory levels.

In areas with the greatest retail saturation, Raymer sees a growing need for retailers to differentiate from each other by targeting specific consumer segments.

“That is the type of thing that you’ll start to see, more specifically, in an area like on Queen Street in Toronto,” she said, referring to a trendy downtown thoroughfare that has come to exemplify cannabis store clustering.

For other retailers in competitive markets, survival might come down to sufficient cash reserves, according to Hello Cannabis’ Verbeek.

“Hopefully, if they are able to wait out competition peeling away, then they can hopefully start capturing market share to get to a profitable, sustainable margin,” he said.

Perry of Toke Cannabis believes the advantage will go to retailers like herself with previous experience in the unregulated market.

“I think business owners that come from the legacy market have a step up on everybody else – they know how to curate a menu, they know how to educate the consumer,” she said.

One group that stands to benefit from all of Ontario’s new marijuana outlets is licensed cannabis producers, a number of whom have called for a more robust Ontario marketplace.

“I think overall, companies are pleased to see, at long last, the growth in access at the retail level in Ontario,” said George Smitherman, president and CEO of the Cannabis Council of Canada, which represents a number of major producers.

Smitherman expressed uncertainty regarding whether Canada’s regulated cannabis market is actually capturing as much market share away from the illicit market as recent Statistics Canada estimates have suggested.

Still, he hopes Ontario’s increasingly competitive retail landscape will help tip the balance towards the regulated market.

“We are winning them over, but really, that situation of this strong number of stores does create … competitive tensions that can be very beneficial to consumers.”

“Consumers are getting the best price and the best customer service,” Toke Cannabis’ Perry said.

“Because there are so many options, everybody has to bring their A-game all the time.”

Solomon Israel can be reached at [email protected].