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Ontario paves the way for more pot stores, scrapping lottery system for licences

Customers and staff at the Hunny Pot Cannabis Co. retail cannabis store shop as marijuana retail sales commenced in the province of Ontario, in Toronto, Ontario, Canada April 1, 2019. REUTERS/Moe Doiron

The Ontario government has scrapped its much-maligned lottery system for cannabis retail licences, paving the way for more store openings in the sparsely-served province. 

In a news release issued late Thursday, Attorney General Doug Downey said the Alcohol and Gaming Commission of Ontario (AGCO) will remove the cap on privately licenced stores, and begin accepting new operator applications on Jan. 6, 2020. Store authorization applications are set to begin on Mar. 2. Authorizations from that process are expected to follow at a pace of 20-per-month, beginning in April.

“Our government is determined to open the cannabis market as responsibly as possible," Downey said in the release. “We have said all along that opening more legal stores is the most effective way to combat the illicit market, protect our kids and keep our communities safe. That is our number one priority.”

The policy shift was widely reported on Thursday prior to the announcement. 

Canada legalized recreational cannabis on Oct. 17, 2018. The Ontario government capped the number of physical stores in response to low supply at the onset of legal sales. Most industry observers agree that fears of short supply are now unfounded, with many warning that producers are sitting on a glut of unsold inventory.

Ontario has opened only 24 physical cannabis stores since April 1, 2019, the first day new pot shops were allowed to serve customers. Alberta, a province with about 10 million fewer residents, had 176 stores as of July, according to Statistics Canada.

Under the new rules, retail operators in Ontario will be able to own up to 75 cannabis stores by next September.

Other regulatory changes include eliminating pre-qualification requirements for prospective retailers, and increasing the ability of licensed producers to participate at the retail level. Licensed producers will soon be able to open a store at one of their growing facilities, increasing the potential for tourism. Stores will also be allowed to sell a broader range of pot-related items, like magazines and cookbooks. 

CIBC analyst John Zamparo called Thursday’s announcement “more modest compared to our expectations” in a research note on Friday. He said Ontario’s 2020 target for about 250 stores lags behind the roughly 270 he estimates are currently open in Alberta, where the pace of new stores has been the quickest. 

BMO analyst Tamy Chen was also encouraged by the news. She referred to her previous research as a gauge of the potential impact. Last month, she projected a 35 per cent sales volume increase if Ontario added 325 stores in 2020.  

The Ontario Cannabis Policy Council, a group of industry leaders and experts focused on adult-use pot in the province, applauded the decision.

“With Ontario home to more than half of the recreational LPs, the majority of cannabis employment, and the largest domestic consumer market, opening up Ontario’s cannabis retail market will have a positive effect on job creation, investor confidence, and the economy,” the council said in a statement on Thursday.

“Beyond this, we must ensure private retailers and licensed producers can operate in a regulatory environment where they can compete effectively with the illicit market. To that end, the OCPC calls on the Ontario government to continue along a path of reform and allow LPs to directly negotiate with retailers.”

Ontario sold the most legal cannabis among the provinces in the first year of recreational legalization at $216.8 million, according to Statistics Canada. However, the Ontario Cannabis Store said it lost $42 million in its most recent fiscal year. Costs associated with the abrupt shift from the previous Liberal government’s fully-private model to the current framework added to costs.

Craig Wiggins, managing director of the industry research team TheCannalysts, has been a vocal critic of the government’s handling of the cannabis file since recreational legalization. According to his figures, the province has missed out on $325 million in economic activity, $26 million in provincial sales tax, and $25 million in excise tax.

The lack of stores in Ontario has been widely blamed by executives in the industry for putting a damper on sales at a critical juncture for the sector.

Canopy Growth (WEED.TO)(CGC) CEO Mark Zekulin addressed the issue on a Nov. 14 earnings call with analysts.

“At risk of oversimplifying, the inability of the Ontario government to license retail stores right off the bat has resulted in half of the expected market in Canada simply not existing,” he said. “Ontario represents 40 per cent of the country's population, yet has one retail cannabis store for 600,000 people.”

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.