Ontario’s shift in policy could slow sales: analyst
Hiccups in Canada’s largest market could ‘drag on first-year sales,’ analysts say
With less than 80 days before Canada legalizes marijuana, the rollout in its largest market remains hazy.
While Ontario was the first province to announce how it would regulate and distribute sales in government-run pot shops, a dramatic policy shift by newly elected Premier Doug Ford expected as early as Tuesday could move sales to private retail stores.
There were already concerns Ontario’s stores wouldn’t be ready for legal sales on Oct. 17 and a shift in its retail model makes it more likely initial sales will fall short of expectations, according to Canaccord Genuity analyst Matt Bottomley.
“That will potentially make the sales that we see in the first quarter or two in a legalized market lower,” Bottomley said in a telephone interview. “There’s no way you’re pivoting that platform in anything less than six months.”
Concerns about lagging sales come as investor optimism has tempered in the lead up to Prime Minister Justin Trudeau’s legalization this fall. While market leaders such as Canopy Growth Corp. and Aurora Cannabis Inc. saw their value more than triple in 2017, companies haven’t seen the same meteoric growth of late. Shares of Canopy, which has a market value of $7.2 billion, have gained 13 per cent this year while Aurora has plummeted 27 per cent.
The BI Canada Cannabis Index has tumbled 43 per cent this year after reaching a record high in January.
Companies may see lower revenue in the near-term, depending on what Ontario decides, Bottomley said. But a move to allow marijuana growers to operate retail stores could be positive for companies in the long-term, he added.
Ontario Cannabis Store, modelled closely on the Liquor Control Board of Ontario alcoholsales monopoly, is focused on ensuring the province is ready for cannabis legalization and is working closely with the Ford government, the agency said in an email.
“It will be tight, obviously, to find locations, to get leases and leasehold improvements done will be a very tight timeline,” said Terry Lake, spokesman for Quebec-based marijuana producer Hydropothecary, which hopes to sell its product in Ontario. “It will be a scramble.”
Peter Horvath, chief executive officer of closely held Green Growth Brands, agreed Ontario’s about-face will be a challenge. “They’ll probably take whatever existing real estate they have access to and convert it,” he said. “It won’t be the best foot forward, it’ll be what you can do in two and a half months.”
Legalization plans also appear to be a “mess” in British Columbia, where marijuana demand is expected to be strong, according to PI Financial analyst Jason Zandberg. It’s unclear whether the Pacific-coast province will shut down unlicensed dispensaries this fall and there has been “little movement” on approval of actual retail stores, he said.
Recreational marijuana use has long thrived in British Columbia while authorities looked askance, earning its largest city Vancouver the moniker Vansterdam. The provincial liquor monopoly, which will also be the sole wholesale distributor of non-medicinal cannabis, plans to offer more than 150 strains to its market of discerning customers. To do so, it’s signed supply deals with 31 producers, including Canopy and Aurora.
Licensed private retailers will be able to access the wholesale selection via an online sales ports — eventually. Details of how retailers can register will be released “at a later date,” the B.C. Liquor Distribution Branch said this month. The government agency also plans to operate its own retail outlets under the BC Cannabis Stores brand.
The province hopes to have one retail store operating in Kamloops when cannabis is legalized and is “actively investigating additional suitable locations for stores across the province,” Viviana Zanocco, a provincial liquor agency spokeswoman, said by email. British Columbia is committed to a “careful and efficient” rollout of retail outlets and has “always said it will be a long process,” she said.
Zandberg expects the varied rollout across the country to weigh on the bottom line.
“If there’s some of these hiccups, especially in Ontario, that could definitely have a drag on first-year sales,” the PI Financial analyst said.
“We’ll see some soft numbers out of the gate.”