Ontario Inches Closer to Open Cannabis Market

Jeff-profile
Senior Consultant
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Posted on August 21, 2019

Earlier today, Ontario took a critical step in its slow march towards a more liberalized cannabis retail market. The Alcohol and Gaming Commission of Ontario (“AGCO”) announced the winners of Ontario’s second lottery for cannabis retail store authorizations. 42 successful Expression of Interest applicants will now have the opportunity to complete licensing and store authorization processes with a goal to set up shop in October.

In addition to these successful applicants, eight allocations were previously granted to applicants on First Nations reserves on a first-come first-serve basis, subject to local First Nations Band Council approval.

The province’s first cannabis retail lottery was subject to extensive criticism after the majority of winners were sole proprietors with little experience or capability to set up and operate a cannabis retail store. This led to a feeding frenzy where these golden ticket winners essentially auctioned off commercial partnerships to the highest bidder.

This second lottery took deliberate steps to weed out unprepared applicants and set higher standards that would limit the playing field to larger players. Requirements included:

  • A legal document demonstrating the applicant has the right to possess the secured retail space; and
  • A bank letter confirming access to $250,000 cash and another confirming the ability to get a $50,000 standby letter of credit.

In addition to the more stringent requirements, reports indicate that several prospective retailers faced significant hurdles persuading financial institutions to provide the relevant letters. Many institutions offered a limited set of options, costly processing fees and time-consuming approval processes.

Store Locations

Licences have been divided geographically in the following groupings:

East region: seven stores

  • Three in Innisfil
  • One store in each of the following cities: Nepean, Peterborough, Collingwood and Barrie

GTA region: six stores

  • Two in Burlington
  • Two in Oshawa
  • One store in each of the following cities: Aurora and Burlington

Toronto region: 13 stores

West region: 11 stores

  • Two in London
  • One store in each of the following cities: Kitchener, Hamilton, Welland, Windsor, Stoney Creek, Niagara Falls, Ancaster, St. Catharines and Guelph

North region: five stores

  • One store in each of the following cities: Kenora, North Bay, Sault Ste. Marie, Thunder Bay and Timmins (currently none of these markets have licensed retail stores)

First Nations reserves: eight stores

All Politics are Local

The government’s lifting of prohibition on licences in communities with under 50,000 residents means we can expect to see cannabis storefronts in smaller communities such as Innisfil, Welland, Collingwood and Stouffville for the first time. As a result of major GTA municipalities like Mississauga and Markham opting out of cannabis retail, we will see significantly fewer new stores in the surrounding GTA region with only six new stores in the 905 (compared to 13 in the 416).

It remains to be seen whether any of these new store locations will be subject to community backlash, owing to such issues as proximity to area schools or other sensitive use areas. There were surprisingly few complaints with the initial 25 stores, but some municipalities have been taking steps of late to state their views on where cannabis stores should be located.  The City of Thunder Bay, for example, recently recommended that stores be located at least 150 metres away from parks, community centres, recreational facilities, libraries, watercourses, mental health and addiction facilities and alcohol retail outlets.

While the policy is not binding, it shows a potential resistance at the local level that retailers will need to prepare for and mitigate as they seek to enter new markets. Provincial legislation only requires dispensaries to be at least 150 metres away from schools, meaning other recommendations made are unenforceable.

Building social licence locally will be critical and we recommend that all prospective retailers be mindful of the heightened risks of community backlash owing to the “clustering” of stores in certain municipalities and neighbourhoods following today’s lottery.  For example, five of 13 new stores in Toronto are located on Queen Street, making it the new “cannabis row” fort Canada’s legal market.

Surprises

One of the early sources of surprise in today’s lottery results was a numbered company located on 104 Harbord St. in Toronto, the current location of one of CAFE’s dispensaries. The unlicensed chain has made waves for continuing to operate despite being repeatedly raided by police forces. While it remains unclear what affiliation, if any, the lottery winner has with the dispensary chain, it is highly unlikely that a business with common branding or affiliation will be able to obtain a retail licence and store authorization.

A spokesperson for Ontario’s Attorney General confirmed this in a CBC story, reiterating that Ontario’s Cannabis Licence Act precludes licences from being issued to:

  • Anyone with ties to organized crime;
  • Anyone who has been charged or convicted for contravening the Cannabis Control Act;and
  • Anyone who has illegally sold cannabis after Canada’s legalization date.

The spokesperson also stated that, “licences will not be issued to anyone for who there are reasonable grounds to believe will not act with integrity, honesty or in the public interest.”

What This Means

Today’s lottery results can be seen as the first of a series of steps moving toward a more open, liberalized cannabis market. Despite the province proceeding at a slow pace, it has repeatedly committed to move towards an open allocation of licences.

While supply pressures appear to be alleviating, the ability of the Ontario Cannabis Store to supply Ontario’s recreational market will continue to be tested with an increased retail footprint and the upcoming legalization of new cannabis products (i.e. concentrates, edibles, beverages and topicals). While the new products will technically be legal as of October 17, 2019, Health Canada must be notified 60 days before any product can actually be sold. Given this 60-day rule, edibles, concentrates and other products will not be on shelves until at least mid-December. Early evidence has shown a clear consumer preference for retail sales with legal sales doublingfrom March to April, after the first licensed retailers opened.

In addition to the allocation of more licences, sources have indicated there is consideration by government for Licensed Producers to participate more directly in the retail market.  Potential solutions that the government may consider include:

  • The licensing and authorization of “farmgate” operations on production facilities;
  • Loosening of the current “affiliate” definition that prohibits Licensed Producers from owning more than 9.9% of a licensed retailer; and
  • Creating a framework for private wholesale.

With limited supply, the Ontario Cannabis Store has obvious interest in controlling as much of the recreational cannabis market as possible. However, as supply catches up to demand this conservative-minded government will have an increasingly challenging time justifying a government monopoly over recreational cannabis wholesale. Today’s news is only one of a series of steps we can expect as the Ontario retail market continues to find its feet.

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