[ad_1]
Nearly five years after legalizing recreational marijuana at the federal level, Canada is approaching 4,000 regulated cannabis stores spread unevenly across the enormous country, according to data compiled by MJBizDaily.
The latest quarterly store tally comes as Canada’s cannabis retail sector continues to transform.
Some private-sector retailers are failing, such as major retail chain Fire & Flower, which entered creditor protection in June after years of operating at a loss.
Other retail operators, meanwhile, are acquiring: Fika Cannabis successfully bid 36 million Canadian dollars ($26.7 million) for Fire & Flower at a recent auction.
Still other retailers have simply closed their doors altogether, underscoring the tough operating conditions facing retailers.
On top of the cannabis industry’s usual pitfalls, Canadian retailers must confront:
“The whole Fire & Flower story tells us that really, nobody’s safe out there,” said Raj Grover, CEO of publicly traded retail operator High Tide, Canada’s biggest nonfranchised cannabis retail chain with 156 stores in five provinces.
“If you’re not a really operationally minded company, if your focus is not on your operations, then even (for) some of the larger players that have a balance sheet to sustain their operations in the near term – money does not last forever.”
Tough business conditions
MJBizDaily began compiling quarterly data on Canada’s retail sector earlier this year.
The roughly 3,800 legal cannabis stores and licenses in Canada as of the end of August – about 100 more than in January – is based on data from provincial cannabis retail regulators and monopolies across the country.
The latest tally includes more than 1,700 retail licenses issued in Ontario and nearly 1,000 stores in Alberta, the two provinces with the most stores.
Not all those retailers are constantly packed with customers, according to Krista Raymer, founder of Toronto-based cannabis retail consultancy Vetrina Group.
Most stores earn about 60% of their revenue on Thursdays, Fridays and Saturdays, she said, and operating six or seven days per week might not be viable for some.
Raymer doesn’t believe Canada can support as many cannabis stores as it has at the national level.
“Depending on the geography, we’re probably looking at retail environments that are generating between 28% and maybe 38% gross margins; it doesn’t leave a lot of margin there for you to run your operations within,” she said.
“The majority of the locations across Canada are not exceeding CA$2 million in sales (annually), and so it does make running these environments very difficult to do.
“And, because of that, I think that the reality is setting in for a lot of retailers around what it looks like to run a tight-margin business with, also, low top-line revenue.”
Total retail sales of legal cannabis remain on the rise, federal statistics show, with national sales hitting CA$426 million in June.
But that overall sales growth “doesn’t necessarily translate, always, at the store level,” Raymer said.
New store openings might be driving the month-over-month growth in total cannabis retail sales, or the sales growth could be spread unevenly across the retail sector.
“Especially in some markets, there are a handful of locations that drive a lot of volume and revenue,” she said.
Mergers and acquisitions continue
Given the difficult business environment, the stage is set for continued mergers and acquisitions in Canadian cannabis retail.
A number of cannabis store leases were signed at the dawn of legalization almost five years ago, in October 2018, observed High Tide CEO Grover.
He said some retailers, especially smaller ones, opted for five-year leases.
“So, as some of these leases are coming up now, operators have a choice to either get out of the business, try and sell their business or hold on to it,” Grover said.
“But most likely we’re seeing a lot of these retail leases not being renewed.”
High Tide, which achieved positive free cash flow in its most recent quarter, built roughly half its locations and acquired the others, according to Grover.
“We’re just focused on free cash flow generation, so we’ve taken a bit of a pause on M&A, but we’re going to resume our organic growth soon,” he told MJBizDaily.
“And you’re also going to start hearing about our M&A trajectory picking up steam again.”
Cannabis store acquisitions aren’t limited to corporate chains such as High Tide, however.
Alfred Schaefer, CEO of B.C. retail chain Rural Leaf, said the independent retailer has expanded its portfolio to six locations, including its first acquisition this year.
Over the past year, Schaefer estimates, the number of store operators approaching Rural Leaf in order to sell their businesses has “at least doubled or tripled.”
Schaefer is also co-founder and a director of the Retail Cannabis Council of Canada, which represents mostly independent stores in B.C., Manitoba, Ontario and Saskatchewan.
“I think that a lot of independents that maybe didn’t make the most savvy business cases for themselves, and put themselves in tough positions, a lot of them are in trouble right now,” Schaefer said.
“And I think that’s also why we’re seeing so many businesses go up for sale.”
Almost five years after legalization, Schaefer added, some operators are questioning whether marijuana retail is worthwhile.
Retail opportunities remain
Even as some retail business owners contemplate an exit, others have established successful niches in the cannabis market.
Early expansion in Canadian cannabis retail focused largely on cities, launching a boom in urban marijuana stores while leaving gaps in Canada’s vast rural areas.
Rural Leaf has found its path by focusing on small towns in northern B.C.
Schaefer described the company as “small-town guys.”
“So we tried to figure out – it’s going to sound sort of funny, but – what the smallest town is that could support a store,” he continued.
“And we targeted the places that didn’t have one already.”
In Schaefer’s experience in British Columbia, towns with more than 2,000 people can sustain a weed retailer.
“You’re not going to make screaming money, but it can definitely support a cannabis store,” he said.
Potential retail opportunities remain outside rural areas as well.
“Canada is quickly becoming a saturated cannabis retail market,” High Tide CEO Grover said, but some markets “still remain underserved.”
Several large Canadian cities still don’t allow cannabis retail, such as Markham and Vaughan, Ontario, or Surrey and Richmond, B.C, resulting in retail deserts where brick-and-mortar stores can’t operate.
But, over time, municipal leaders in some cities have changed their minds on permitting legal marijuana stores, opening up new possibilities.
For example, the major city of Mississauga, Ontario, opted in April to allow cannabis stores.
Ontario’s cannabis retail regulator has now approved 13 stores in Mississauga, with 17 more working to obtain licenses.
In some provinces, evolving retail regulations permitting farm-gate cannabis sales have created new opportunities for retail marijuana sales directly from licensed producers’ facilities.
Some provincial retail authorities have also eased up on certain regulatory requirements for cannabis stores, such as reversing requirements for window coverings in light of store robberies or permitting deliveries on a permanent basis in the wake of COVID-19.
Rural Leaf’s Schaefer also sees opportunities in commercial consumption lounges and cannabis tourism.
Still, he expects some contraction in the Canadian cannabis retail sector and points out that the Canadian economy – which is grappling with a rapid run-up in interest rates in reaction to high inflation – “is not super great right now.”
“So that will probably speed some things along as well,” Schaefer said.
“But anyways, it’s not all bad news, and I think that there’s definitely some exciting opportunity coming up as well.”
Retail consultant Raymer believes Canada’s total number of cannabis stores “will shrink, more in some markets than others. … Small (business) owners, or owners who own maybe one to two or three stores, will ask themselves, ‘Why am I doing this?’
“Larger operators will have to make the tough decision around what stores make sense to keep operating and which ones don’t.”
High Tide’s Grover said Canadian cannabis retail has become “highly, highly competitive in all markets where we operate.”
“So, if you don’t have a very strong, differentiated retail concept, you’re doing the same thing that everybody else is doing – you’re buying cannabis from the same provincial distributors and wholesalers that everybody else is,” he added.
Solomon Israel can be reached at solomon.israel@mjbizdaily.com.
[ad_2]
Source link
