Matt Maurer quoted by The Globe and Mail

Matt Maurer, Co-chair of the Cannabis Law Group and Chair of the Franchise Law Group, was quoted by The Globe and Mail on the potential closures of cannabis retailers in Ontario. 

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Sasha Soeterik, the owner of independent cannabis retail shop Flower Pot in downtown Toronto, was renovating her premises in preparation to open in the spring of 2020 when she noticed a competitor doing the same just two doors away.

The rival shop was part of a national chain of cannabis stores – Superette – that already had two locations in downtown Toronto, and had secured licences from the Alcohol and Gaming Commission of Ontario to open another five stores within a radius of less than 10 kilometres.

“I thought to myself, ‘Oh no, it’s one of the big guys opening up next to me. This can’t be good,’” Ms. Soeterik told The Globe and Mail.

She had a rough time getting her store open to begin with. Flower Pot – located just north of Trinity Bellwoods Park, in the fashionable and densely populated neighbourhood of Queen West – obtained its licence to operate from the AGCO on March 13, 2020, when much of the world was grinding to a halt from the COVID-19 pandemic. The store was slated to open last August, after passing through layers of mandatory background checks, but the Ontario government restricted the opening of new cannabis stores to just five a week, meaning Ms. Soeterik had to wait her turn.

“We opened in October, then they shut us down in November when the second [pandemic] wave hit,” she said. “We simply got unlucky on timing. Now they’re opening 30 stores a week, and there are no restrictions on distance between stores. It’s a much, much harder retail game now because of how saturated the market is.”

Indeed, the number of legal cannabis stores in Ontario has exploded over the past seven months, a sharp contrast in pace to the province’s sputtering start in cannabis retail two years ago. Back then, Ontario was bogged down by various bureaucratic hurdles and a highly controversial lottery system that tightly restricted the number of retail licences.

In early 2020, there were just 67 stores open across the province. But today there are 817, according to numbers provided by the AGCO. Another 173 stores, including the Superette store next to Flower Pot, are on the verge of opening, having obtained Retail Store Authorization (RSA) licences, the final step in the process.

This dramatic mushrooming of cannabis shops is cause for concern, industry experts say. Some of them now believe a wave of shutdowns is on the horizon if the province keeps granting more store licences.

“Not everyone is going to make it,” said Matt Maurer, a partner at the Bay Street law firm Torkin Manes, and the co-chair of the firm’s cannabis group. “Some owners are definitely having a tough go. No one likes having four other cannabis stores on their block.”

Current AGCO data show there are 1,039 RSA applications in the queue, meaning the number of outlets could burgeon even further, eventually surpassing the total number of stores selling alcohol in Ontario.

And the provincewide figures don’t show how densely concentrated cannabis stores are in some areas.

There are approximately 280 stores either open or authorized to open in Toronto, many of them clustered together in high-density neighbourhoods. A three-kilometre stretch on Queen Street West, for example, has 23 cannabis stores either open or about to open.

There are another eight cannabis stores just a block north of that, on Dundas Street West. Nearby Kensington Market, which was a hotbed of cannabis-friendly venues long before legalization, now has a cluster of five legal stores, two of them next to each other.

There are no real restrictions as to where cannabis stores can be located in Ontario, except they have to be at least 150 metres away from schools. Some cities, such as Mississauga and Markham, have voted against allowing cannabis stores altogether, blocking out large portions of the Greater Toronto Area as potential store locations. So why did clusters of them emerge elsewhere?

One reason, according to Mr. Maurer, was the way the province allocated its first batch of retail licences. A shortage of cannabis supply in the early days of legalization in late 2018 prompted the government to set up a lottery system to dispense licences.

The two lottery rounds that took place in January and April, 2019, allocated just 67 licences. But hundreds of applicants raced to get financing commitments and lock in leases at exorbitant prices just to qualify for the lottery.

“Everyone thought getting a retail licence would be a gold mine. So you saw all these people applying, with no knowledge of where the other applicant was signing a lease until it became apparent in the public notice process weeks later,” Mr. Maurer said.

Alicia Myers, a store manager at Dynasty Pot Shop on Queen Street West in Toronto, described the past six months as a “struggle.”

“There’s just an abundance of the same products being sold in most of the shops. It’s worse still when you have so many shops doors away from you,” she said.

In an attempt to compete with the independents and the chain stores in the area, Dynasty has started selling accessories, such as kits to grow cannabis plants at home and pot-related clothing imported from California. She also hopes members of the community will support independent retail stores like hers over larger, better-capitalized chains such as Tokyo Smoke and Fire & Flower.

Despite the pandemic and the increasingly saturated retail market in Ontario, some of those large chains have seen their revenues grow over the past year. Fire & Flower Holdings Corp., which operates more than 80 Fire & Flower-branded cannabis stores across the country (most of them in Alberta and Ontario), saw its revenue double to $44-million for the three months ended May 31, compared with the same quarter in 2020. High Tide Inc., which runs 87 cannabis stores in Canada, also saw its revenue double, from $19.6-million for the quarter ended April 30, 2020, to $40.9-million the same quarter a year later.

Andrew Semple, a cannabis sector analyst with the mid-market investment firm Echelon Wealth Partners, said these retail chains would have seen their revenue grow even more had it not been for the pandemic. 

“There is still opportunity for cannabis stores to thrive in Ontario, but the companies most likely to perform well are those with a larger store network. I think if you’re looking at a single store location versus a chain, the independent store has their work cut out for them,” he told The Globe.

Mr. Semple also pointed out large, fancy stores that banked on extravagant locations to lure customers may have a hard time surviving. “Their leases can be hefty and overhead is high,” he said.

But Mr. Maurer, the lawyer at Torkin Manes, said the future of cannabis retail in Ontario isn’t clear-cut. The market will “bear itself out” over time and there will be store closings, he said, but they will not necessarily be confined to small independent stores.

“We don’t know who is going to survive yet because everyone is waiting for the province to open up to see this through. Many have committed to five-year leases and cannot find someone else to sublease to,” he explained, adding customer loyalty in a given neighbourhood will be a key factor in determining which businesses succeed.

Meanwhile, there are entrepreneurs undeterred by how crowded the cannabis retail sector already is, and they are attempting to bring different models to the space. Mihi Cannabis, a mid-sized cannabis retail chain based in Burlington, Ont., is partnering up with Shiny Buds, another mid-sized chain, to open up new 200-square-foot stores within PenguinPickUp locations across Ontario. PenguinPickUps are outlets where customers can ship items and collect online purchases from retailers such as Amazon or Walmart.

Mihi chief executive officer Kevin Reed says his goal is to open 200 stores in the province by 2024, mostly “convenience-style stores” in PenguinPickUps. “We will sublease an area of the PenguinPickUp. Our first store will open in July in downtown Toronto, and we are hoping to have four more open very shortly after that.” 

For Ms. Soeterik however, the owner of Flower Pot, the legal cannabis retail industry in Ontario has morphed into a “rich man’s game,” in which the only real hope for small businesses is to eventually be bought up by a larger chain, or to bank on the generosity of the community around them to survive. She casts most of the blame on the provincial government, for failing to institute rules that would have given independent businesses advantages.

“I do think it would have been prudent to come up with a minimum distance between stores. They’ve always said they want to give small businesses a chance, but I don’t see what they have done to ensure that,” she said.

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This article originally appeared in The Globe and Mail.