Sundial CEO predicts ‘massive’ cannabis store closures in Canada

The CEO of one of Canada’s largest operators of adult-use cannabis stores is sounding the alarm over a wave of potential closures.

In a letter to shareholders, Sundial Growers CEO Zachary George discussed his two years at the helm of the Calgary, Alberta-based business, and warned the “trickle” of cannabis store closures could grow into a flood “with the toll likely closer to 1,000 than 100.”

George didn’t share specific reasons for the expected mass store closures.

However, Canada’s marijuana retailers have fended off stiff competition while coping with falling prices eating into margins and oversaturation in some areas.

As of last month, 3,138 cannabis stores were open across Canada, according to Cannabis Benchmarks, an industry data provider.

That means upwards of one-third of all retailers could be at risk, according to the CEO.

Ontario alone had 1,468 regulated marijuana stores open as of May 2 – almost half of all the legal cannabis stores in Canada.

George called the phenomenon a “slow motion train wreck.”

“Most retailers are struggling to be profitable, and we are starting to observe a trickle of closures on a weekly basis,” he wrote in the letter.

Sundial said it manages Canada’s largest private sector marijuana retail network, with approximately 180 locations.

Those locations consist of corporate-owned stores, franchised locations, and others.

Last year, Sundial bought Spiritleaf’s retail store network for 131 million Canadian dollars ($107 million) in cash and shares. The deal came with 86 corporate and franchise locations, which has since grown to 104 stores.

George said Sundial closed 11 stores “and will continue to evaluate our retail portfolio to optimize quality and profitability.”

“Sundial’s retail network creates an opportunity to own the relationship with cannabis consumers and showcase both Sundial’s branded products and the best offerings from other Canadian licensed producers,” George  wrote.

Sundial also holds an approximate 63% interest in Nova Cannabis – a retailer operating in Alberta, Saskatchewan and Ontario – via its recent CA$346 million acquisition of Alcanna, one of the largest private-sector retailers of alcohol in North America.

In the letter, George said Sundial doesn’t intend to acquire the minority interest in Nova, “and we are prohibited from doing so in the province of Ontario due to current regulations.”

“Instead, we intend to play the roles of sponsor and franchisor, supporting Nova with capital and operational expertise,” he wrote.

“We aim to create a liquid, investable, and dominant Canadian enterprise focused on multi-banner cannabis retail. As long as Canada’s regulatory regime remains in its current form, this cannabis distribution infrastructure has the opportunity to play a critical role in the consumer experience.”

In the letter, George also candidly discussed his two years as CEO.

“As a team, we have transformed our company from a poorly positioned business on the verge of bankruptcy to one of the largest Canadian regulated product platforms with an industry-leading balance sheet,” he wrote.

George said survival was the priority.

“Sundial was akin to a patient in the ICU. Our favorite consumer packaged goods purist pundits predicted our demise and repeatedly read Sundial’s obituary. Despite being pushed by our lenders at several points to prepare to seek creditor protection, our board made leadership changes and never abandoned their posts,” he wrote.

George ended the letter with highlights of the fiscal year ended Dec. 31, 2021, noting that the company ended the year with no debt, more than CA$1 billion of net liquidity, and quarterly records of adjusted EBITDA, a measure of profitability.

Sundial’s net loss for the year was CA$230 million, according to the company’s financial statements released this week.

Net revenue in 2021 was CA$56.1 million, the second consecutive year of decline.