If Alberta is the wild west of Canadian cannabis retail, Ontario can be considered an imperial capital, a hub of bureaucracy, red tape, and ever changing regulations.
Ontario has had a mired experience dealing with legal aspects of cannabis, whether it be a back-and-forth on public cannabis consumption to a constantly evolving cannabis retail model.
Currently there are 100 retail stores open across Ontario’s six regions (East 16, First Nation 2, GTA 13, North 9, Toronto 38, and West 22) and the province saw 35 million grams of retail cannabis sold over the last year, (7.2 million grams via the OCS and 27.9 million grams via cannabis retail stores) accounting for 385 million dollars in sales (roughly 71.5 million dollars via OCS.ca and 314 million dollars via cannabis retail stores), according to the OCS.
In this piece we conduct an overview of the cannabis retail scene in Ontario to get a sense of what it’s like to open up shop, what’s moving, how cannabis 2.0 impacted business, whether market saturation is of concern, and how COVID-19 affected operations.
Ontario: From Legalization to Today
It has not been smooth sailing for those who make the decision to enter the cannabis retail market in Ontario.
The previous Liberal government opted to create a public framework for cannabis retail sales, but following the fall of that government and the election of the Progressive Conservatives, things shifted to a private model which through its evolution featured two rounds of lotteries, the implementation of merit-based open allocation of licensing and temporary regulatory changes due to COVID19 that are soon-to-be rescinded. It’s been a non-stop journey of hurdles for participants to overcome on their pathway towards both profitability and success.
“We’ve seen regulations change from a fully open model to a limited license model with the 25 stores, then the second round lottery and where we are now,” said Mimi Lam, CEO & co-founder of the Superette, a cannabis retail store located in Ottawa which is slated to open another Ottawa location and three in Toronto soon.
“We’ve had to work really hard [and] we’ve been quite lucky, but the reality is it’s quite challenging to be successful in the space and to continue to push through, especially with all the regulatory changes,” said Lam, adding that staying “nimble” allowed the company to “push the boundaries of what is legal and acceptable” while differentiating the brand and ensuring “a little fun” for the customer.
Sam Katzman opened Greentown Alberta last year, which he recently sold to open Greentown Cannabis in Windsor Ontario at the end of June as a result of merit based licensing.
“I put my name into both the first and second lottery and obviously I wasn’t selected,” said Katzman. “I wouldn’t say it was frustrating. The odds were so slim. So many people applied, it was almost unrealistic to think that you had a chance, you could fool yourself but truth be told it’s minuscule odds.”
Katzman first wanted to operate in Ontario in his hometown but “because of the lottery system” he wasn’t able to. “The minute I could apply for my retail operator license, I did at 12:05 a.m… I am happy that Ontario switched away from the lottery system, to more to a merit based system.”
Opening Kana Leaf
Ontario’s first regulated cannabis retail store located on a First Nation – on Nipissing First Nation late last year was no small feat for Curtis Avery and his partners as the nation had already established cannabis laws prohibiting the sale of cannabis to those under the age of 21 and edibles in their entirety.
“What they were actually doing by creating a 21 plus market [was] creating a negative feedback system in which the younger individuals were just propping up that black market because they couldn’t even come get legal supply,” said Avery. “They were seeking out black market means.”
Avery and the Kana Leaf team took part in two community consultations and explained that with only roughly 400 members living on Nippissing land – contrasted to the 53,000 that live in neighbouring North Bay and the 15,000 that drive nearby on a daily basis via King’s Highway 17 TransCanada – the result of the law inhibited cannabis sales to the greater public because of “unnecessary fears and anxieties” by a small group of concerned members.
Having changed the law proved to be a double-edged sword though as it “paved a lot of the way” for other cannabis retail stores to open on Nipissing First Nation according to Avery, who added that new retailers have the “luxury” of “the full fruits and features” of a cannabis retail system that he and his partners “had to fight for”.
What’s Moving?
Dried flower is still a top selling product for all retailers, especially with large format options now available.
“People are still gravitating towards high THC products [and] a large segment of the customers are still quite price conscious,” said Lam, adding that premium products also sell well, primarily due to both customer education and broader awareness of what products are available.
“There are definitely brands that we gravitate towards,” said Lam, noting that product type and product quality both are key determining factors for whether to stock a product. “… it really depends on how informed the customer is once a customer is a little more educated, that conversation and narrative changes quite a bit ”
While Katzman wasn’t surprised to see dried flower as a top seller, what did surprise him was the noticeable drop in demand for it in Ontario compared to Alberta.
“Dried flower in Alberta was about 90% of the sales, and now it’s down to…sixty five percent,” said Katzman. “…but it’s still dried flower [that customers purchase most], it’s still number one.”
Katzman noted that while an eighth of an ounce is the top selling format of dried flower he sells, customers are slowly gravitating towards both seven and 15 gram options.
“There’s some great stuff out there. I give the LPs a lot of credit because they’ve done a fabulous job,” he said.
When asked what was moving up north at Kana Leaf, Avery quickly noted “everything”.
“Everything moves,” he mused. “… the thing with this market is it’s so new, it’s such a large market, really, everything goes.”
Cannabis 2.0
With the introduction of 2.0 products, both Lam and Avery explained that while customers are interested in trying new products and formats that there are still issues at the production side leaving much to be desired, primarily a consistent supply.
“2.0 products are still pretty tricky, just because on the producer side [they’re] still trying to figure it out,” said Lam who went on to explain that supply of both beverages and edibles is not consistent which inhibits an ability to accurately gauge demand.
“It’s really difficult to really understand what that demand looks like… until we get to point where it’s a little bit more stable, and we get a little bit more consistent supply and also more availability, so we have more than a handful of skews in brands, it’ll be a lot easier to tell,” she said.
Similarly, Avery noted that the difficulty he faces with 2.0 products is the amount retailers are able to purchase from the OCS.
“But what I’m finding is the 2.0 products, it’s harder and harder to acquire enough of the product because we can only purchase so much from those OCS,” he said.
Both Lam and Avery also made clear that the 10 milligram limit on the amount of THC per package also inhibits the opportunities for significant 2.0 sales.
“… the biggest challenge is Health Canada and the limitations on milligrams per package,” said Lam. “It’s really expensive for what you get. That segment will continue to see some challenges until packaging rules change.”
Avery understands the desire of politicians and regulators to roll out a new program slowly in order to make sure society is ready to handle products with a higher THC content, but he explained that the current 10 milligram limit “deters a little bit from the black market” for some consumers, but also at the same time it helps “bolster” it.
“These [higher THC content] edible products are out there and we all know where you can buy them with way higher concentrations, and that’s what people are used to,” he said. “We’re waiting for the day that they do increase the 10 milligrams per package, and I can tell you customers are eagerly awaiting as well.
Market Saturation?
Whether it be from other legal retailers or the existing illicit market, there is no lack of supply of cannabis to those looking, but none of these retailers are concerned about a saturated marketplace generally.
“I think we’re quite far away from being too saturated,” said Lam who speculated that much of the commentary surrounding saturation has to do with certain geographic areas that see a “clustering of stores” at major intersections. “I think when it gets to that point, it’s a little silly, but from an aggregate level, we are very far from saturation.”
“The interesting piece about the cannabis industry is you’re building demand with new customers, but with the people who already consume, there has never been a supply and demand issue. People who want cannabis have found ways to get it, and it’s making sure that we can shift the demand from the illicit market into legal channels,” she said.
“The more channels that we have and [the] more customers, the more choice you can give [and] the more of this industry will act like any other normal consumer based industry,” said Lam, adding that nobody questions how many restaurants or coffee shops are located on a single block.
Prior to entering cannabis retail, Katzman was concerned about the illicit market – and even today acknowledges it’s “crazy” to think about the market share of the illicit side of the industry – but after learning what’s offered to consumers in the legal market his concerns subsided.
“I was concerned about the black market, you know, because you hear about what they provide and the service they provide. But now they’ve dropped their prices so much because they’re feeling the heat from legal retailers, and now I know why…the product…just top shelf stuff,” he said. “It’s great stuff. So the legal market is just going to keep chewing into that black market, day after day, after day after day, which I think is exciting as a new retailer in Ontario.”
At Kana Leaf, Avery and his team keep prices of their products at a lower point than that of stores in North Bay which helps grow a clientele, but he mused that a new clustering of stores not on First Nation land could cause new retailers issues due to increased competition.
“In town however, there are a lot of cannabis shops opening up, some of them really next to each other, it’s going to be quite different,” he said. “I think it’ll take about a year to two years before we start seeing some of them drop away,the market’s starting to settle. You’re going to see some of those new shops not really be successful.”
COVID-19 Curveball
COVID-19 impacted the operations of all retailers who scrambled to adjust to the ‘new normal’ during a global pandemic.
“We know that cannabis is a highly desired product and it’s also resilient to economic downturns, and we’ve proven that with COVID now. Cannabis companies are uniquely positioned to deal with crises and then deal with change because we’ve had to do that our entire life of our company,” said Lam.
While being able to offer delivery and pick-up for customers was beneficial to both the industry and customers according to Lam, the fact that the Ontario government is taking it away from retailers after they adapted to the new changes “leaves a lot to desire” from an industry, economic and public health standpoint.
“In general… the silver lining to it [COVID-19], has proven cannabis to be resilient and that it’s an essential business,” she said. “Hopefully everyone who has dealt with this this year can really look back and learn [from it].”
