Why High Tide has pegged Ontario for even more growth

The company became Canada's biggest cannabis retailer after acquiring Meta Growth last week. Its CEO explains what's next.

When the deal to acquire Meta Growth closes, High Tide will own the biggest cannabis retail network in Canada. But that doesn’t mean it plans to rest, as the company is looking to roughly double its footprint in the next year-and-a-half.

As part of an agreement announced on Friday, High Tide will acquire all issued and outstanding shares of Meta Growth, with Raj Grover, president and CEO of High Tide, and his team leading the combined entity. Meta’s CEO Mark Goliger and CFO Mike Cosic will remain on through the transition period.

The new entity will be the largest cannabis retail network in Canada, with 63 stores between its banners and an estimated $133 million in annualized revenue.

High Tide owns the Canna Cabana banner, which was one of the more aggressive players when it came to establishing itself as a national cannabis retail chain. It currently has 24 stores in Alberta (with six more slated to open in the near future), seven in Ontario and two in Saskatchewan. It also owns several KushBar locations in Alberta, but is in the process of divesting from them.

Meta Growth operates Meta Cannabis, which has eight stores in Manitoba, two in Ontario and one in Saskatchewan, as well as New Leaf, which has 21 stores in Alberta (plus two more opening soon).

Grover says that, for the time being, there are no plans to eliminate or consolidate any of the banners, but Canna Cabana will get the focus of future growth. That’s because it is a more premium brand, but also because Canna Cabana has a legacy in selling cannabis accessories before it began selling recreational cannabis, which provides a differentiated “one stop shop” offering in the market.

“We don’t want to spend additional capital [on rebranding stores] if it’s not required,” Grover says. “But we are going to optimize the Meta and Newleaf retail stores with accessories. We have industry leading margins on accessories that we design and manufacture ourselves. It’s a low-hanging fruit to add to the 33 locations we’ll be inheriting, so we’ll be able to generate more revenue and gross margins.”

Besides roughly doubling its retail footprint overnight, Grover says a major factor in the acquisition was getting access to $21 million combined cash, allowing it to proceed with an ambitious growth plan without the need to raise more capital, something that has become increasingly difficult in the cannabis market in recent months. Grover also describes the two entities as being very similar, which will help it drive between $8 million and $9 million in cost synergies in the year following the deal.

The plan for High Tide is to grow to 115 locations by the end of 2021, with an aggressive focus on the Ontario market, which has become a high priority for many cannabis retailers since the provincial government moved away from a lottery system earlier this year. Inner Spirit Holdings’ Spiritleaf opened its ninth Ontario location in July (bringing its national count to 58) and has 17 more locations in various stages of development in the province. Between corporate-owned stores, licensed third-party stores and locations that are soon to open, Canopy Growth’s Tokyo Smoke will soon have 20 locations in Ontario.

Grover cites the fact that Ontario currently has 114 stores serving a population of nearly 15 million – compared to Alberta’s 500 stores for 4.3 million people – to illustrate why Ontario is “the real prize.”

“You see the disconnect there,” he says. “We’re such a differentiated experience in retail, we feel that incentivizes a larger crowd to come in and should help us differentiate from the competition. It took almost two years for market saturation to happen in Alberta, so I definitely think Ontario has a lot of potential that is going to remain for at least a few more years.”

In Alberta, no one entity is allowed to own more than 15% of the total cannabis licenses, which has set the cap at 42 stores until the end of the year. The combined entity has now hit that cap, which Grover says is a positive, allowing the company to focus on Ontario knowing it is serving the Alberta market as best as it can – though it does hold some leases, which it will develop “selectively” in markets where it makes sense when the cap is raised. It also holds several properties in British Columbia, where it has been waiting two years to get licensing approval, though Grover says it has seen some movement on the files in recent weeks and expects to have approval on at least “a couple” locations by the end of the year.

The cannabis market was not immune to business impacts as a result of COVID-19, but signs point to recovery, especially in Ontario. Grover says that in Alberta, business boomed in the months following legalization, but same-store sales began to plateau in August of last year, before beginning to inch up since the outset of the pandemic. In Ontario, its locations took “a sizeable hit,” and sales for new stores it’s opened since March have not hit the same levels as previous locations. However, Ontario has added 80 stores since the pandemic began, which has increased competition, and Grover notes that consumers have been less likely to go out and discover new stores near them. Plus, the OCS owns the delivery channel in Ontario, during a time when consumer demand for delivery across categories is at an all-time high.

“We’re starting to see sales come back in Ontario, though they’re not back to their pre-pandemic levels,” Grover says. “But considering all these factors, the sales we have seen make Ontario seem more effective than Alberta in some sense.”