Why Ontario pot retailers are worried about a new wave of cannabis stores set to hit the market

After a stalled rollout, Ontario is aiming to approve dozens of cannabis retail outlets each week with the goal of hitting 1,000 stores across the province by the fall.

But the prospect of more competition, especially during a pandemic, has some in the industry predicting a shakeout in the marijuana marketplace.

Vivianne Wilson, the founder and president of GreenPort Cannabis on College Street in the heart of Little Italy, opened her story on Oct. 17, 2020 after waiting almost a year to get it approved.

"We opened during the pandemic, so we don't know what normal is. As soon as we opened we were on lockdown again so people can't come into the store," she said. Wilson added that the retail experience is how she hoped to differentiate her store.

By last summer, Ontario had authorized just 100 cannabis retail stores, fuelling criticism that the slow rollout was hurting legal sales and helping the black market.

Now the Alcohol and Gaming Commission of Ontario, which regulates the cannabis industry, is aiming to approve 30 retail store authorizations per week.

But with in-store shopping curtailed in many regions due to COVID-19 restrictions, Wilson says it's been tough times for cannabis startups like hers. She's concerned about the impact all those new stores will have.

 "We opened a brand new business in a brand new industry during the pandemic, so those are huge strikes against any new business to begin with," she said. "It's inevitable that independent stores will feel that impact and I guess we'll have to wait to see see how dramatic it truly is."

Trevor Fencott. the CEO and president of Fire and Flower, Canada's largest cannabis retail chain, says despite adding so many stores, Ontario's model doesn't work. He says having the Ontario Cannabis Store (OCS), the Crown corporation that manages online retail also handle the wholesale distribution to private retailers, is a mistake.

"There's an attempt to change the narrative, but really we're still where we were before, which is that the government is operating a monopoly in direct competition with private retailers." 

Fencott prefers the Saskatchewan model, where the government is the regulator, but not the wholesaler and retailer. He predicts that the OCS "taking gross margins from private retailers" will make them less competitive.

"They are going to end up with fewer stores and perhaps that's the clarion call if these mom and pops are not able to sustain themselves. So it might take some business failures."

Daffyd Roderick, the Ontario Cannabis Store's senior director of communications, says the cannabis sector is not immune to the factors that affect other retailers.

"You see a real range of creative expression about what a cannabis store should look like across the province and that's the real gain in having the private sector involved. And that means some will be very successful and some are going to struggle."

But Roderick says the last report for the quarter ending Dec. 31, 2020 showed gains for the industry and healthy margins for private retailers.

Ontario hit a high with $251 million in legal sales in the fourth quarter of last year. That's about about 32 million grams of weed, up 23 per cent over the previous quarter. That means the legal market has now captured 40 per cent of all cannabis sold in Ontario, up from 36 per cent. 

As for bankruptcies, consolidations and failures, he says the figures don't show there's a problem.

"You're still seeing some stores changing hands. There will be successes there will be failures, but that's the nature of an open marketplace," he said.

"We have yet to see a store close its doors since legalization occurred."

Jay Rosenthal. the co-founder and president of the research and analysis firm Business of Cannabis, says while many stores are clustering in some Toronto-area communities, there are still many parts of Ontario where getting legal cannabis is still inconvenient.

"Even with the ramp up ... saturation of cannabis retail stores is a long way off," said Rosenthal. 

He says where there is strong competition, retailers with capital and experience, such as, Value Buds, Fire & Flower, High Tide  will thrive, but there is room for neighbourhood stores rooted in the community.

In fact, even though the OCS offers lower prices online than private retailers, $6.40 per gram versus $9.45 per gram, customers seem to prefer their local stores.

Almost 90 per cent of all legal cannabis in Ontario is bought from private retailers.

"If consumers prefer buying from private retailers and COVID has shown that private retailers can responsibly and responsively offer products through e-commerce and delivery, why does the OCS have an e-commerce function at all?" asked Rosenthal.

Back at GreenPort, Vivianne Wilson says OCS is appreciated by small and medium operators.

"Having the OCS as a wholesaler negotiating for us, especially as an independent, is fantastic," she said. 

"I don't think that if they took that away we would be able to get the same price as a lot of wealthier corporations with more stores."