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New Ontario cannabis store ownership cap expected to boost M&A

A new regulatory change allowing one company to operate up to 150 recreational cannabis stores in Ontario – a twofold increase from the previous cap of 75 – is expected to benefit large retail chains and drive more consolidation in Canada’s most valuable adult-use market.

The increase also could bring new opportunities for smaller retail operators looking to sell their stores, although some Ontario cannabis retail insiders caution that buyers’ offers might not meet sellers’ expectations.

The new policy was announced Nov. 30 and took effect Jan. 1.

Lisa Bigioni, CEO and co-founder of independent Ontario retailer Stok’d Cannabis, said some local media interpreted the regulatory change as meaning more stores will open overall.

“I don’t necessarily think that’s the case,” she said. “I don’t think there’s really much room for that many more stores.

“But I think it opens up opportunity for smaller stores to potentially be purchased.”

Some of the biggest corporate cannabis retailers focus on selling low-cost marijuana at slim margins, observed Shahbaaz Kara-Virani, co-founder of Toronto-based CannAcquire, which connects buyers and sellers in retail acquisitions.

Consolidation under those banners could accelerate the price-compression trend in Canada’s cutthroat cannabis market, he said.

That price compression could be a problem for independent retailers, Kara-Virani explained.

In the Canadian cannabis market, it’s alleged that so-called data deals are similar to slotting fees in other retail sectors. They might involve cannabis producers paying retailers for sales data in exchange for preferential treatment of their products in stores.

“A lot of these larger players are working with (cannabis) brands to drive those data deals and acquire additional revenue streams with those data deals, which makes it harder for independents, because independents might not have the infrastructure nor the buying power of these large chains,” Kara-Virani said.

Retail consolidation trend

Kara-Virani expects the next six to 18 months to “see significant consolidation” in Ontario cannabis retail.

“Three to five years from now, it’s going to be the same model as we see with a lot of different retail (sectors), where it’s going to be five to six players,” he said.

“I think this (new retail cap) is a prime catalyst for consolidation and mergers and acquisition.”

Ontario’s recreational marijuana market, which was worth 177.7 million Canadian dollars ($133 million) in October, has grown crowded in some urban centers.

Nearly 1,800 store licenses have been issued across the province.

A slightly lower figure hints at the number of licensed stores already open for business: As of Jan. 9, 1,699 active retailer accounts had placed at least one order with the Ontario Cannabis Store, the provincial marijuana wholesaler told MJBizDaily.

Plenty of cannabis retail M&A has already happened in Ontario.

Recent examples include:

Rule change benefits big retailers

Large, corporate chains are poised to benefit most from the increased store ownership cap.

“Right now, this cap change really only helps five or six of the large retail (operators),” said Eric Chittim, vice president of supply chain with privately held retailer True North Cannabis Co., which operates 50 stores.

Publicly traded retailer High Tide, with 54 stores in Ontario, is one that stands to benefit.

Increasing the cap “levels the playing field” against major cannabis retail franchises, argued Omar Yar Khan, chief communications and public affairs officer with High Tide, which does not operate franchises.

The ownership-cap regulation prevents a retail applicant and its “affiliates” from being issued more than 150 licenses.

However, the definition of affiliates doesn’t include stores owned by franchisees, Khan explained.

Some retail franchises were nearing the previous 75-store cap: For example, Tokyo Smoke has 75 retail licenses either granted or in progress, according to data from the Alcohol and Gaming Commission of Ontario.

“I think the way the government decided to address that imbalance was, rather than amend the definition of ‘affiliate,’ they just decided to increase the cap altogether to give everybody a chance to move over that 75 (store) threshold,” Khan said.

High Tide CEO Raj Gover has said he anticipates adding 100 more of the brand’s locations, which would bring High Tide to the 150-store cap.

“We’re going to do it responsibly and over time,” Khan added.

“It’s not overnight, and I suspect that it’ll be through a combination of some organic store openings and probably some acquisitions.”

Still, Khan reckons that even if a single retail chain hits the 150-store limit, that company would have only about 8% of the province’s total store count.

“It’s not as if any one player will get to dominate the market,” he said.

Impact on smaller retailers

Ontario still has plenty of independent retail operators, CannAcquire’s Kara-Virani noted.

With the new store ownership cap set to benefit larger players, those independent operators might begin to weigh their options, he said.

“No. 1, if you are doing well as an Ontario independent retailer, chances are that a larger chain has already understood your geographic location and either is going to try and acquire you or, No. 2, they’re going to come in and move right beside you and try and eat some of that market share,” Kara-Virani said.

However, stores aren’t necessarily worth as much as they were in early days of marijuana legalization, when licenses were limited.

An opportunity to get acquired “can be really good for small chains that are interested in selling for whatever reason,” said Bigioni, whose independent chain Stok’d has four stores.

“I think it can be a wake-up call for some other small independents that might think they’d like to be purchased” but might be offered less than they think their stores are worth, she added.

CannAcquire’s Kara-Virani offered a similar sentiment.

“The problem with M&A in this space is, a lot of the sellers think that they’re worth maybe more than they are – and a lot of the time, the buyers think that they deserve to acquire for less,” he said.

Time will tell whether the increased store ownership cap will erode illicit cannabis sales, one of the Ontario government’s stated objectives for the policy change.

Kara-Virani expects the larger cap will contribute to reducing illicit sales by increasing the number of legal stores, but it won’t be a panacea and more enforcement against illicit stores would also help.

“There’s still illicit stores on the same streets as the legal stores,” Kara-Virani said.

“Look at downtown Toronto: Across the street from where I live, there’s three legal stores and three illicit stores.”

High Tide’s Khan said the provinces of Alberta, Manitoba and Saskatchewan have captured more market share away from the illicit market than Ontario has.

“If you look at Alberta, in particular, their store concentration per 10,000 residents is double that of Ontario,” he said.

“And their rate of illicit market sales is about half that of Ontario.”

Alberta abolished its store ownership cap in 2020.

Meanwhile, Ontario’s ownership cap increase has no effect on another issue constraining market growth: Cannabis stores still aren’t permitted in several major cities and towns, including Markham, Oakville, Vaughan and Whitby, as well as a number of smaller municipalities.

True North’s Chittim suggested that the increased ownership cap at least demonstrates political will for cannabis policy reform in Ontario.

“The ability for the Ontario government to have (had) an idea and have passed a bill in such a short amount of time is such a great harbinger that (says), ‘Hey, we can actually implement change in the cannabis industry in a short amount of time and have results,’” Chittim said.

Solomon Israel can be reached at

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