Canopy May Franchise Pot Stores in Response to Ontario Rules

(Bloomberg) -- Companies are developing workarounds to Ontario’s ownership restrictions on pot shops, with Canopy Growth Corp. exploring a franchise model and Alcanna Inc. considering an independent company.

A corporation isn’t eligible for a cannabis retail license in Canada’s most populous province if it’s more than 9.9 percent owned or controlled by one or more pot producers, Ontario said in rules issued this week. Its goal is to limit the growers’ dominance of the retail market, limiting them to one location on the site of a production facility.

This could thwart the ambitions of several retailers, including Canopy’s wholly owned Tokyo Smoke, and Alcanna, which is 25 percent owned by Aurora Cannabis Inc.

But the companies said they were unconcerned and were already working on retail plans that would comply with the provincial rules.

“McDonald’s doesn’t own every McDonald’s but there are a lot of McDonald’s,” Canopy Chief Executive Officer Bruce Linton said in an interview. “It’s really more about data and experience and I think we can get that on a franchise model.”

When asked whether he’d consider spinning off Tokyo Smoke, Linton said, “Oh god no. It’s a great brand. I think we nailed it.”

Repeat Customers

Linton said his primary goal is to ensure repeat customers by having an educated retail staff who can provide a quality experience. He also praised the Progressive Conservative government’s decision to push ahead with hundreds of privately run stores, instead of the restricted government-run model favored by the previous Liberal government.

“More volume and more access turns into a much more consumer friendly model,” he said.

Edmonton, Alberta-based Alcanna still fully intends to enter the Ontario market and is looking at setting up an independent company that would be 39.9 percent owned by Alcanna, a level that would reduce Aurora’s ownership to the 9.9 percent required under the provincial rules. The remainder would be owned by a partner with knowledge of the Ontario market and other investors, Alcanna CEO James Burns said in an interview.

“We actually have no end of options, it’s just a matter of selecting the partners,” he said. “But we’ll be there, no question.”

U.S. Companies

National Access Cannabis Corp., which recently closed a financing that saw four licensed producers take a combined stake of 12 percent, could also be affected by the rules. It has a partnership with Second Cup Ltd., which said earlier this month that it has identified more than 20 Ontario locations that it hopes to convert into pot shops. Those plans may not be possible under the new regulations. Neither company immediately responded to a request for comment.

One partnership that appears to be unaffected is Cronos Group Inc.’s joint venture with California-based MedMen Enterprises Inc. The U.S. company isn’t licensed to produce in Canada and Cronos doesn’t hold a stake in the company, seemingly giving it a leg up on domestic producers.

Ontario will begin accepting applications for retail licenses on Dec. 17 and stores will begin opening on April 1, the province said Wednesday. Until then, the government-run Ontario Cannabis Store website is the only place where Ontarians can legally buy recreational pot.

©2018 Bloomberg L.P.