Toronto Retail Cannabis Market Sees Thinning Margins
The Toronto retail cannabis market is seeing thinning margins – but it’s not because of dropping consumer interest. Michael Motala, who operates High Street Cannabis Retail with his parents, said that new competition and over-regulation made the family decide to sell the business.
“The space is highly restrictive and regulated to the point where it is a comedy of the absurd,” Motala said.
High Street, which opened in October 2020, is now for sale for just under $2 million. Motala said in the area he’s in near Queen St. West and Bathurst St., there are some stores making only five or 10 sales per day. “That’s pretty much impossible to survive on,” he said.
“A lot of people probably got into this thinking that it would be a gold mine,” he said about the Toronto retail cannabis market, “but unfortunately we’re finding out that’s not the case.”
The Ontario Cannabis Store (OCS), the province’s cannabis wholesaler, announced the opening of the 1,000th cannabis store in Ontario in September 2021. About one quarter of those stores where in Toronto. At the time, even the OCS wondered if 1,000 was too many.
“Unfortunately, this rapid growth will likely result in some retailers being faced with increased competition and a crowded marketplace, which could result in some closures and market rightsizing,” David Lobo, the interim president and chief executive of the Ontario Cannabis Store, said last summer. “At the core, all retailers will be challenged to further drive a relentless focus on targeted consumer segments and differentiating themselves from others.”
Some in the Toronto retail cannabis market have reacted by shrinking their floorspace to reduce overhead.
However, based on the number of Alberta stores, Ontario could in theory support 3,000 stores. Toronto alone should be able to support 293 stores based on the 10,000 rule – one store for every 10,000 people.
So what’s going on in the Toronto retail cannabis market?
Toronto Retail Cannabis Market Might Be Headed to Monopolies – LPC
Lucas McCann, chief scientific officer at CannDelta Inc., agreed that competition – including competition from the OCS – is putting pressure on many in the Toronto retail cannabis market. That’s leading to many stores going up for sale.
“There’s a sense that it’s better to throw in the towel now rather than wait down the road and not get what they presumed to be under market value for their store,” McCann said.
How many stores are for sale in the Toronto retail cannabis market is unclear. There are six publicly listed for sale in the city. However, most happen privately. High Tide Inc. CEO Raj Grover said he sometimes gets “five request a week” to buy their stores.
“But we don’t want to just buy stores or buy companies for the sake of it,” Grover said. “We want to buy them because they’re financially strong businesses and we can improve them.”
It’s quite possible that although Toronto could support more stores, some stores are getting the lion’s share while others are left in the cold. That could lead to monopolies, Motala said.
“My worry is that it’s going to turn into the Beer Store model, where you have two or three dominant retail chains and that’s it,” he said. “I don’t think the government put enough protection in there for the little guys.”
With average per-store sales dropping from $3.2 million in December 2019 to $2.3 million in August 2021, it’s clear the shift will affect some stores in the Toronto cannabis retail market more than others.
“It’s going to be a bloodbath here so you have to operate on traditional metrics,” said Kiaro Brands’ Daniel Petrov.
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