Canadian cannabis entrepreneurs dream big in the face of uncertainty

Trevor Fencott looks at the bare wooden beams in a stripped-down Edmonton retail store and sees nothing but possibility. He muses about cooking classes, perhaps lectures and community events in the barren space.

It's late June and Fencott has high hopes for this faded brick storefront on Whyte Avenue. He wants to turn it into the neighbourhood's oasis of weed.

Fencott is CEO of Fire and Flower, an aggressive entrant in the retail cannabis industry. His ambition is to shape the early pot-purchasing experience for Canadians and build a dominant brand, which can be expanded internationally as cannabis laws evolve throughout Europe and South America.

But the last part of that dream, the international expansion, will all depend on "getting Canada right," he says.

And that is already proving difficult.

Canada's cannabis retailers must follow a myriad of federal, provincial and municipal rules when marijuana is legalized for recreational use on Oct. 17. The stigma of dealing in a product which has been illegal and villainized for decades has perhaps created a culture of caution in the bureaucracy entrusted with establishing the regulations in this space.

Fire and Flower received just one of the 51 licences granted in Saskatchewan, which were awarded through a random draw from the more than 1,500 applications the province received.

It did better in Alberta, where 37 stores were approved.

So far, the company hasn't secured a licence in Manitoba, and it is still waiting to hear back about its eight applications in B.C., which is the maximum number of submissions that the province allows.

Fencott admits that building a chain of retail pot stores is a daunting proposition in an industry where the rules change from province to province, town to town, and in some cases, week by week.

"We're in a very emergent dynamic situation — and we know that coming in. I mean, that's why our investors are risk investors," he said.

Among the company's larger investors are licensed cannabis producers Aphria and Hexo, which are prohibited from owning stores, but are free to put money into companies like Fire and Flower.

The privately owned retailer would not say how much it has spent overall so far, but through news releases and statements, it has publicly disclosed an investment of at least $27 million to date to help get its stores up and running.

While the stakes are high, so too is the potential windfall. Accounting firm Deloitte estimates Canadians will spend as much as $4.34 billion in the first year of the country's legal cannabis market.

An industry 'full of risk'

Kyle Murray, the vice-dean at the University of Alberta's School of Business, has been watching the development of the cannabis business with amazement. He says the only possible comparisons to legalization are the early days of the internet, or the end of liquor prohibition.

"There's all kinds of hyperbole, there's all kinds of salesmen, CEOs, lots of new companies — everyone's talking about all kinds of growth," he said.

There's no doubt there will be big winners in the cannabis sweepstakes, Murray says, but he believes there is also the potential for some huge losses.

"I think what we're looking at is an industry that's full of risk. We know that some of these companies are going to fail, some will be acquired, some will close, and some of them probably will grow very rapidly and make their shareholders happy."

Right now, he says, it's impossible to say which brands will succeed and which will fail.

In the end, it comes down to luck

Fire and Flower has spent millions building its brand, but still hasn't earned its first dollar. It began assembling a team of top retail talent long before it had even been granted its first licence. It has leased retail locations throughout Western Canada, hired and trained 47 retail managers — all on the assumption that it will be able to position itself as a market leader.

"We have a broad portfolio of real estate holdings, we have a broad portfolio of licence applications in various stages," Fencott said.

That financial outlay is a major part of the costly challenge facing private retail stores.

In most cases, before store owners can apply for a retail licence, they have to have a lease signed. But there are no guarantees that having buildings, staff and startup money will translate into a licensed store — or multiple licensed stores, in the case of those trying to build a large retail brand.

"Initially what seemed possible was no longer possible in some markets," Murray said of the competitive regulatory landscape. "You couldn't just open stores, you also had to get a little bit lucky, and be one of the ones selected to have a licence in that location.

• Alberta's private retail model lures cannabis retailer to Edmonton
• Cannabis retailers may pay 10 times more for a business licence than Edmonton liquor stores 
• Process 'doesn't make sense,' says pot company about Edmonton's business licence lottery 

For Fire and Flower, its multimillion dollar investment and carefully crafted retail image will see just four stores open on Oct. 17. Three are in the Edmonton region, and the fourth is in Yorkton, Sask.

The Whyte Avenue outlet that Fencott was wistfully dreaming about in June remains an empty shell, tied up by municipal regulations. In total, the company is still waiting to move ahead on 34 of its Alberta stores.

But Fencott remains undaunted.

"We're not going to be able to rest. We're going to have to keep opening stores. So as soon as we finish the first batch, we're going to move onto the second, and the third, and the fourth, and again. We're going to be all over Alberta."

With files from Raffy Boudjikanian