Cannabis retailers rejoiced last night as credible rumours surfaced that the Province of Ontario is now going to allow private retailers to sell cannabis to the public. The Globe & Mail also reported confirmation from a senior source in the Ontario government.
The government will no longer open its own retail stores (Ontario Cannabis Store) similar to the LCBO liquor locations. Grizzle viewed the OCS as a dead on arrival retail strategy for the province akin to the Lada of cannabis.
This is a big deal for licensed producers and private retailers as a new market of 14.4 million people, 40% of Canada has just been opened.
In this article we will break down the lingering questions that need to be answered and the capabilities required by the Ontario government to avoid large-scale bankruptcies of retail stores in the years to come.
Some Questions Remain Unanswered
Before we can fully understand the impact private retail will have on marijuana stocks there are some important details that need to be released.
Twitter rumours from Deepak Anand, a well-respected industry consultant, point to online recreational sales being handled by the province exclusively.
This is an important detail we need confirmation on as online sales would provide a powerful tool for private retailers to build their brand and maximize economies of scale, volumes, and profitability.
If retailers are stuck with brick-and-mortar stores as the only sales and branding channel then location, product selection, and store experience will become all important.
Who is the Middleman?
Rumours also point to the Ontario government retaining a monopoly as the only distributor and wholesaler of marijuana in the province.
This means that the government is the only buyer licensed producers can sell to and the only supplier retail stores can buy from.
This feature of the market is critically important and will determine how profitable physical retail will be.
When the price of legal marijuana begins to compress next year as Grizzle expects, if the government is slow to adjust the price it pays licensed producers and more importantly the wholesale price it charges retail stores, we could see stagnating legal sales, leading to financial difficulties for both growers and retailers.
The legal industry will soon be producing 2 million kg a year compared to demand of less than 1 million so theoretically, prices in legal retail stores need to be LESS than the black market or else the industry will have piles of marijuana sitting unsold.
However, we know legal prices will be higher than the black market on October 17, leading to questions around how much volume legal retailers will actually sell.
Will the Black Market be Brought Into the light?
Though we don’t expect the government to announce an explicit limit on the number of retail licences, we think licence approvals will move slowly, imposing an artificial cap, similar to how growing and sales licences are handled today.
There are a significant number of unlicensed retailers already operating in the province.
The big question for competition in the early days of legalization is if these retailers will be able to convert to legal licensed players in the retail game.
If so the playing field will be even more crowded than we already expect with the flood of new applicants.
Quebec Will Be Next
Quebec is unlikely to allow private cannabis retailers when marijuana goes legal on October 17 as they have already gone too far through planning and initial construction of government-owned stores.
We think this move by Ontario could put pressure on Quebec to allow non-government retailers to enter the market in coming years.
- A lack of store locations due to a slow roll-out by the government could lead to long lines and push Quebeckers to buy online, hurting the profitability of government-owned stores.
- Private retail stores in Ontario will likely have a greater selection and potentially a better customer experience and could lead to Quebeckers crossing the border to purchase their supply or if possible buying off the Ontario cannabis website and having it shipped across provincial borders.
- Licensed producers and large Ontario retailers will lobby for Quebec to open its retail channel to competition.
- Unintended consequences from the government owning most of the supply chain could force privatization of retail.
Premier Doug Ford has taken a huge step forward in giving consumers and the cannabis industry what they wanted.
Private retail stores have a better chance of taking business away from the black market come October 17.
The big question remains: can private retail stores make money when they’re buying from a slow moving government entity, but competing against a nimble, fast-moving black market.
We will know the answer in only a few months.
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