Pot Companies Welcome Private Stores in Sea Change by Ford

(Bloomberg) -- Canada’s cannabis companies say they’re ready to start building stores in Ontario if the government allows private sales of recreational marijuana, in what would be a dramatic policy shift by Doug Ford’s new government less than three months before legalization.

Premier Ford may announce as early as next week a plan to allow private stores to sell pot, scrapping a system unveiled by his predecessor to limit sales to government-run outlets, the Globe and Mail reported Friday. Pot stocks jumped on the report.

While the timeline will be tight, producers say it will help them develop their brands and open more stores than was planned by former Liberal Premier Kathleen Wynne. Under her government’s timeline, Ontario’s liquor monopoly, known as the Liquor Control Board of Ontario, would have opened just 40 stores this year.

“I absolutely support it, I think it’s great,” said Peter Horvath, chief executive officer of privately held Green Growth Brands Ltd., who previously worked at retailers including Victoria’s Secret and American Eagle Outfitters. “Commerce dictates customer experience, so the customers will get to vote for what kind of experience they want with their pocketbooks.”

Canopy Growth Corp., the largest publicly traded pot company with a market value of C$7.3 billion ($5.6 billion), is already developing stores in multiple provinces and recently announced a plan to acquire Hiku Brands Co. to strengthen its retail and brand portfolio. Canopy could expand its existing store-construction plan to Canada’s most populous province, although it would require a lot of work to meet the October legalization date, CEO Bruce Linton said in a phone interview from Vancouver.

Some Downside

“Here’s the only downside: what do you think we’re looking at for the next 14 months? We already have stores in multiple provinces and we have supply contracts in every province and a territory,” Linton said. “Now we look at this and depending on how many stores you get this could add up to hiring 1,000 more employees.”

Hydropothecary Corp. spokesman Terry Lake agreed, saying “it will be a scramble.” Based in Quebec, Hydropothecary said earlier this week that it has invested C$10 million in Fire & Flower Inc., giving it a toehold in the retail market.

“We anticipated Ontario could be a possibility and Fire & Flower gives us a great entree into the retail cannabis market in Ontario,” Lake said in a phone interview. “It was a very timely investment.”

Stocks Rally

The province will still control the wholesale and distribution of marijuana to stores and manage online sales, the Globe reported, citing officials it didn’t identify. The government will make the announcement on July 31, according to BNN Bloomberg.

“Ontario will be ready with a system in place that meets the objectives of protecting youth and eliminating the illegal market,” Ministry of Finance spokesman Scott Blodgett said in an email.

Pot stocks rose Friday, with Canopy gaining 2.9 percent to C$33.73 at 11:45 a.m. in Toronto. Aphria Inc. climbed 4 percent and Aurora Cannabis Inc. added 2 percent.

Trudeau Plan

Prime Minister Justin Trudeau set Oct. 17 as the date recreational pot will become legal in Canada, a first for any Group of Seven nation. Provincial governments are responsible for administering retail distribution, with pot sales across the country expected to reach as high as C$7.2 billion in 2019, according to a report from Deloitte LLP. Retail sales will vary by province, with Alberta adopting fully private stores, and Quebec selling through its government-run alcohol agency.

Linton said private retail outlets would allow Canopy to develop “a pretty deep brand loyalty.” He estimated that the company is spending “north of C$200 a square foot” on its stores and is focusing on quality and consistency.

But with only about 80 days to go until legalization takes effect, “we are highly skeptical that Ontario will be able to make such a significant change to its planned retail platform in this timeframe,” Canaccord Genuity analyst Matt Bottomley wrote in a note.

While the shift to a private-sector model will complicate the process, it will be beneficial for licensed producers, or LPs, Bottomley said.

Higher Margins

“We believe the potential for LPs to achieve higher margins over the long term could be significantly improved, through benefiting from retail selling prices in a more vertically integrated business model,” he wrote. “As Ontario will likely represent 40 percent of the market in Canada, we believe this could improve the potential economics for LPs materially.”

Eight Capital analyst Graeme Kreindler said private retail could result in operating margins as high as 36 percent, and named Canopy, Aphria, Hydropothecary Corp., Cronos Group Inc., MedMen Enterprises Inc., Aurora Cannabis and grocery chain Loblaw Cos. as potential beneficiaries.

Ontario’s previous government had planned to open as many as 150 state-run cannabis stores within its LCBO outlets. Ford’s Progressive Conservatives won a majority government on a populist message in June’s election, which saw the incumbent Liberals reduced to third-party status.

©2018 Bloomberg L.P.