Opinion: The real reason why there are two marijuana stores on every block

Opinion: The real reason why there are two marijuana stores on every block

An employee helps a customer at the Fire and Flower store in Ottawa on April 1, 2019, as the first legal cannabis stores open in the province of Ontario.CHRIS WATTIE/Reuters

Chad Finkelstein is a business lawyer and registered trademark agent at Dale & Lessmann LLP in Toronto, with a focus on franchising, licensing, distribution, retail and cannabis.

Currently, approximately 1,500 cannabis stores are open or approved in Ontario, 450 in British Columbia and 760 in Alberta (these being the three most populous provinces that have privatized cannabis retail operations). In most cities, one might find two or more cannabis stores on the same block, at the same intersection or within the same plaza.

People often express confusion about, or even resentment toward, this concentration of cannabis stores, and wonder how any of them could make money, or why anybody would want to open one, or how this could have come about.

It’s a question with no easy answers. To pin it on any one factor would be like saying the cause of the French Revolution was the price of bread, or that Rome fell because the last emperor was deposed. The factors in the store concentration are myriad and complex, and they all interacted with each other to produce the collective dumpster fire we see now.

It began with how provincial governments issued licences.

If you wanted to open a sushi restaurant at a popular intersection, you could canvass the neighbourhood to see whether one was already operating there. If the intersection was saturated with sushi restaurants, you would likely look elsewhere. Cannabis store owners lacked this visibility in the early days of retail cannabis licensing. While Ontario, British Columbia and Alberta each opened up a retail licensing application process on different dates, that process became accessible to everyone at the exact same time (Ontario’s retail cannabis lotteries excepted).

When entrepreneurs were signing leases for cannabis stores, paying application fees to provincial regulators and submitting applications for licences, most of them had no way to know whether another entrepreneur had signed a lease for a cannabis store nearby.

This lack of visibility into competitive businesses at the time that licensing opened meant that most applicants did not become aware of how many people had the same idea as them until that competitor’s store signage went up or the application of that competitor became publicized. And, intrepid entrepreneurship notwithstanding, most everyone had the same ideas, be it on the same densely populated street in an urban centre or in the same remote rural community.

Licences were slow to be issued. In Ontario, the cannabis retail lottery resulted in only a handful of stores before licensing opened up to the broader general public. In British Columbia, ownership was capped at eight stores per person or brand. And when licensing was opened to the general public in Ontario, the Alcohol and Gaming Commission of Ontario was overwhelmed with applications and communicated that applicants should expect a processing time of 12 to 18 months before a retail licence could be issued.

This led to an issue of scarcity. The fewer stores there were, the more money each was making, and the longer the lines were out the door of customers eager to legally purchase cannabis. This scarcity led to perceptions of exceptional profitability in cannabis store ownership, leading to more leases being signed, more licence applications being submitted and more processing backlog, leading to even greater scarcity.

Soon, companies with the capital to do so were paying massive premiums to purchase existing stores or simply to buy their way into an earlier spot in the licensing queue so they could be quicker to open.

These overvaluations were highly publicized. Most anyone paying cursory attention to the cannabis industry became aware of how much money cannabis store owners or licence applicants at the front of the processing line were being paid. The result was wild exuberance over the prospect of signing a lease, submitting a licence application, opening up and quickly selling to one of the many eager buyers gobbling up as much retail space as possible before their competitors did, and overpaying considerably to do so. That exuberance, of course, led to more stores being opened, with most every applicant possessing undaunted confidence that their store and brand could withstand the nearby competition.

When the pandemic hit, the retail landscape of brick-and-mortar storefronts was decimated. Everyone was staying home and shopping online, leading to the unfortunate closings of untold retail stores and restaurants. Landlords were eager to fill these vacancies, and there were scores of well-funded, highly capitalized, eager cannabis store owners.

Cannabis stores quickly became the most reliable retail store tenant. Giving everyone involved the benefit of the doubt, these developments were natural byproducts of the events that preceded those new leases being signed. But it strains the ability to give that credit when one observes multiple cannabis stores within blocks or plazas, each owned by the same landlord.

This brings us to present day. Retail cannabis business owners now have complete visibility into the field of competition surrounding them. Licences are no longer scarce, and provincial regulators have seen a dramatic decrease in the number of applications submitted. Many stores are not making enough money to be profitable. There are simply too many of them. Gone are the days of purchase price premiums and knowing overvaluations. A considerable volume of store owners are selling for cents on the dollar just to be relieved of their lease obligations and liabilities. And landlords are viewing potential cannabis store tenants with more skepticism.

I expect that this trend will continue. Those that can afford to buy stores will continue to do so, largely by hunting for bargains and controlling markets by sheer volume of store acquisitions, rather than building and opening new ones. The mergers-and-acquisitions activity in the cannabis retail sector will persist, but at a much less frenetic pace and with fewer headline-grabbing deal sizes. Those stores that are struggling are likely to either sell on the cheap or close entirely.

One should not look to governments to solve the issue through regulation. This market will self-correct, as all markets do. There will be fewer stores in operation, and fewer in close proximity to one another. Those that remain will have viable businesses, as the market for retail cannabis still demonstrably exists.

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