Cannabis retail: Shrinkage ahead

Why an industry that added 1,300 stores in the course of a year is ripe for consolidation.

Cannabis_Unsplash_stockBy Will Novosedlik

In the span of a single block of Bloor Street West, a leafy affluent neighbourhood in Toronto’s west end, you can find two of Canada’s largest cannabis retailers – Fire & Flower and Spiritleaf – situated directly across the street from each other.

According to the trade journal Business of Cannabis, there were 3,138 cannabis stores in Canada as of the end of March, 2022, up by 1,344 stores – a jump of 75% – compared to March 2021. During Q1 2022, an average of 74 new stores opened each month, compared to 127 stores added monthly during the same quarter in 2021. Price reporting agency Cannabis Benchmarks counted 3,230 stores as of June 30, which means that in Q2, the new store average fell to about 30 stores a month. The industry, it appears, is ripe for consolidation.

With 140 stores across five provinces, Canna Cabana, owned by High Tide, is the largest of the pack. Its leadership status is partly due to the fact that it started out in 2009 manufacturing and selling accessories – bongs, pipes, vapes and grinders – under the banner Smokers Corner. That gave it a nine-year head start to build a customer base ahead of the legal market opening up in 2018.

Chief revenue officer Andy Palalas has been with the company since 2016 and has seen it grow rapidly over the last four years. “A lot has changed in that time,” says Palalas. “We’re seeing lots more people who are new to legal cannabis. They are leaving the legacy market because of the quality and variety the legal market can now offer. But it wasn’t always that way.”

At the time of legalization, retailers didn’t really have the tools to attract that customer. Nor did they have the product quality. LPs struggled to put out high THC products, which is what customers demand. Accordingly, legal vendors played second fiddle to the black market for the first year. But the quality of cannabis and the variety of products has grown exponentially. “Today, more than ever, our focus is to offer an enormous selection of products because cannabis consumers value variety,” says Palalas.

As the largest player, Canna Cabana is in a position to be a leading consolidator. “We are the preferred consolidator,” according to Palalas. “Some operators that came in early are discovering that this is a difficult business. There’s a lot of red tape, which means you really have to be committed to succeed in cannabis retail. There’s a lot of turbulence and that’s not for everybody, so folks are pulling out.” In the past few months Canna Cabana has acquired Bud Heaven, Crossroads Cannabis (three stores) and nine stores from Choom, a national retailer that recently filed for bankruptcy protection.

When it comes to red tape, Ontario-based True North Cannabis has a lot to say. With 46 locations across the province, it has more stores in Ontario than anyone else, all located in secondary urban markets. Eric Chittim is VP supply chain. He is not as upbeat about the state of the cannabis nation – or in this case, province. The Ontario Cannabis Retail Corporation is his daily headache. “My experience with the OCRC at time of legalization was much better than today,” says Chittim. “Their operations have deteriorated. Nothing we get from them is clear or consistent, and now we’re really seeing the pains with their subcontractors.”

That aligns with the Auditor General’s scathing audit of the OCRC in December of 2021. The auditor found significant deficiencies across a range of areas, from sales forecasting and timely responses to customer complaints, to contract management oversight of Domain Logistics (the third party responsible for inventory warehousing and product distribution operations) and safeguarding of customer data retained by Domain and its subcontractors.

While Palalas is sanguine about the future of cannabis retail, one can only imagine how smaller players – at least in Ontario – are navigating these obstacles. A recent Toronto Star article suggested that a third of stores in the city could disappear, confirming the turbulence doesn’t look like it’s going to let up anytime soon.

Want more of our special reports on the cannabis industry?

Cannabis in Canada: Then and now » strategy (strategyonline.ca)

Cannabis marketing: It’s all about the gatekeeper » strategy (strategyonline.ca)