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Could Ontario’s Retail Ramp-Up Help Cannabis?

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On December 12, CBC News reported the Ontario government plans to remove the cap on the number of cannabis shops owned by private retailers in the province. Attorney general Doug Downey also announced the elimination of the lottery system for allocating retail licenses in Ontario. The new rule is set to become effective on January 1.

As reported by BNN Bloomberg, the Alcohol and Gaming Commission of Ontario (or AGCO) will accept retail license applications from January 6 and store authorization applications from March 2. Ontario will be issuing around 20 store authorization licenses every month from April 2020. The government has planned to allow each private operator to open a maximum of ten retail stores in the province up until August 31, 2020. The cap is 30 for 2020 and then a maximum of 75 retail stores by September 2021. The government also plans to allow licensed producers to open retail stores at one of their facilities.

After this news, the Horizons Marijuana Life Sciences Index ETF (HMMJ) and the Cambria Cannabis ETF (TOKE) closed 3.44% and 2.19% higher, respectively, on December 12. Aurora Cannabis (ACB), Aphria (APHA), HEXO (HEXO), and Cronos (CRON) rose 6.12%, 7.77%, 1.83%, and 7.04%, respectively.

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Cannabis retail footprint could expand significantly

On August 21, AGCO announced the 42 applicants selected in the second cannabis retail store lottery draws on August 20. As reported by BNN Bloomberg, the 42 proposed stores will open up in Ontario this month. Furthermore, BNN Bloomberg reports Ontario is planning to open up to 1,000 retail stores by the end of 2020. Cowen cannabis analyst Vivien Azer expects the 1,000 new retail stores in Ontario to significantly boost Canada’s addressable cannabis market. She has also projected $950 million in additional sales for the province, assuming Ontario’s retail store count increases from 24 to 72. On September 26, 2018, Ontario established AGCO as the regulator to grant retail licenses to private operators.

Ontario anticipates a robust launch for Cannabis 2.0 products

On December 6, in an interview with BNN Bloomberg, OCS (Ontario Cannabis Store) interim CEO Cal Bricker expressed confidence in the province’s readiness for Cannabis 2.0. He does not anticipate supply-side shortages during Cannabis 2.0 launches. He expects cannabis-infused edibles, beverages, and vape products to become available in Ontario starting January 6, 2020. Bricker wants to ensure licensed producers are ready for a smooth Cannabis 2.0 launch in Ontario.

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OrganiGram reported lower revenue due to challenges in Ontario

In its fourth-quarter earnings release, OrganiGram (OGI) highlighted the importance of opening retail outlets in Ontario and Quebec, the two most populated provinces in Canada. The company has claimed readiness for Ontario’s planned retail network expansion.

However, business in the province proved challenging for the company in the fourth quarter. OrganiGram partly attributed its low revenue growth in the fourth quarter to a slower-than-anticipated retail rollout in Ontario. The company also reported product returns from OCS. OCS returned SKUs (stock-keeping units) of recreational oils and lower-THC dried flowers. However, recreational oils have not proven to be a high-demand product for recreational marijuana users. Dried cannabis flowers have also see lower-than-anticipated demand, partly due to limited retail infrastructure in Ontario.

Despite these challenges, in its fourth-quarter earnings call, OrganiGram said it offers the three bestselling pre-rolls in Ontario. These products are made from the company’s Edison City Lights, Rio Bravo, and Casablanca strains. OCS has also listed Rio Bravo and Casablanca as two of the most frequently ordered strains on its website.

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Canopy Growth and HEXO also highlight infrastructure challenges

In its second-quarter earnings call, Canopy Growth highlighted Ontario’s inability to license retail stores fast enough as a major culprit in almost halving the addressable recreational market opportunity in Canada. Ontario accounts for almost 40% of Canada’s population. Yet, the current retail penetration is only one store per 600,000 people.

In its fourth-quarter earnings call, HEXO also highlighted the imbalance in the population and retail penetration in Ontario and Quebec. While these two provinces make up 60% of the country’s population, they currently account for only 10% cannabis stores in Canada.

Ontario aims to reduce the illicit market

As reported by BNN Bloomberg, Ontario aims to reduce the illicit market by overhauling its retail license allocation system. The province aims to offer more options to consumers to purchase legal and regulated cannabis products. However, in an interview with BNN Bloomberg, Dale & Lessmann partner Chad Finkelstein claimed that these changes may not significantly affect the illegal market in the short term. He expects an increase in retail infrastructure to reduce the illicit market by 2020 or 2021.

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