New Ontario online weed distribution rules have some LPs scratching their heads

The Ontario government unleashed their plans for future province-wide distribution of cannabis today, with the resulting program leaving as many questions unanswered as answered.

The main question I’m hearing in the wake of the announcement relates to online sales, and whether Ontario intends to take over online sales in the province, or work in tandem with existing online sellers – the national licensed producers that have already run the gauntlet in terms of security, quality assurance, and financing.

From CBC:

The plan means the LCBO will oversee the legal retailing of cannabis across the province through the new stand-alone stores and an online ordering service — meaning cannabis and alcohol will not be sold alongside each other.

Unclear.

So I called a few of my go-to guys to get their take, and the feedback was very mixed.

Supreme Pharmaceuticals (FIRE.V) boss John Fowler said, as the announcement was being made and I asked him what this meant for his company, “Not clear.”

He added, “I ASSUME province will own the e-commerce… why would they share?”

Fair point.

Abcann Global (ABCN.V) director and outgoing CEO Aaron Keay said, when asked if the rules would prevent his company from continuing to sell online in the province, “No prevention whatsoever.”

But that was early this morning, and I’m sure every LP has been talking to lawyers and lobbyists since to see if that’s actually the case.

Some companies went straight into communications mode.

Canopy Growth Corp (WEED.T) put out a statement that appeared to straddle both of those stances, advising the provincial government to incorporate existing distribution networks while the new network is being established.

Including e-commerce is a key aspect of this announcement, particularly given the Province’s tiered retail storefront roll-out plan. We encourage the government to consider allowing existing licensed producers to continue their e-commerce sales if this can allow for a more cost-effective, expeditious, and varied sales model for Ontarians.

Canopy President Mark Zekulin is supportive of the province’s plans, but told HuffPo, “A private distribution model could work just as well or even better in some circumstances.” Canopy has been not so quietly probing the dispensary space for some time, preparing for an eventuality where they may be able to operate their own storefronts.

Organigram (OGI.V) boss Greg Engel appeared to indicate, in the same interview, that he’s fine with the government handling his online distribution.

“There is a lot of experience at the LCBO,” he said.

I called Trent Kitsch, CEO of new Kelowna BC licensee DOJA (DOJA.C), as he was finishing the last paragraph on a news release that will outline his company’s approach to the Ontario news.

In a nutshell: “We like it, and think it’s likely to become a model for other provinces to follow,” he said.

He added, “In our experience with Kitsch Wines, which has long done business with provincial licensing and distribution bodies, we’ve never seen this as a problem at all. In fact, when you go back to our last business, Saxx Underwear, doing a distribution deal with Sportcheck was a lot easier way to get across the country than going to individuals. We’re just going to keep focusing on building the brand, which we think will be important to consumers regardless of how they receive the end product.”

DOJA’s new cannabis education lounge is in the final stages of completion in downtown Kelowna, and Kitsch says he’s not bothered if it turns out that facility can never distribute his product.

“It’s a cafe ultimately and will do fine business with that alone, but we’ve seen just today, even while we’re still doing construction on the thing, at least forty people have come in for information about DOJA and cannabis in general, so the interest level is extreme and we’re excited about what’s to come.”

Not everyone had their answers ready on the e-commerce front today. Aphria (APH.T) put out a news release that was basically a suck-up job to the government, compelling them to buy from Aphria because they’re all sorts of awesome, and not mentioning online sales at all.

And Hydropothecary (THCX.V) put one out announcing they’d given themselves stock options, natch.

I haven’t spoken to Emblem (EMC.V) or Green Organic Dutchman (TGOD) today but I know it’s a big part of the business plan for both outfits that they have, from inception, been designed for single-buyer distribution. Both expect to do big business with institutional level purchasers and have for some time.

The other question I’m hearing a lot today is, whether other provinces will take Ontario’s lead and use their model for their own systems. The answer to that has evolved over the day, but is now a firm yes.

Out east, the Maritimes, Quebec and PEI have said in recent days they prefer such a model. The prairies don’t seem able to find a policy any easier than they can find a hill on the skyline. Alberta, home to the giant Aurora (ACB.V) grow, may cede to local money and help that company use the province as a launchpad, with local storefronts, though there’s been nothing firm on that front.

BC’s new NDP government has been quiet on the topic, but I know government employee union officials have been involved in helping establish training courses for the future industry at Kwantlen (such that they are after a team of consultants managed to gut the program in an effort to squeeze more money out of it).

I had been under the impression that the BC NDP may go easy on dispensary owners in the province, at least those that have followed the rules set out municipally in Vancouver and Victoria, but today I’ve heard from two reliable sources that repeated what another told me a few weeks ago; that health authorities are working under the guidance that BC will run cannabis distribution through provincial liquor stores proper, and that the staff training needed for that to happen is ongoing right now.

This will mean, essentially, that there’ a beyond strong likelihood that Canada’s entire cannabis distribution system will be handled by provincial government owned and operated liquor distribution networks and stores.

For the LPs, that means they’ll need to do some long term preparation and make serious changes:

• Margin will be everything. Ontario has made it clear they will be keeping prices low to keep the black market down. That will hurt growers, not the retailer. Canopy knows this, which is why they just announced their million sq ft expansion, to keep up with Aurora’s. Some LPs are honestly not geared up for cheap weed, and will be hurt by this.
• Your patient lists, once the measure by which all LPs were measured… will be worthless under a model where the customer is the government. This will hit companies that have built their companies around such assets, like Canopy and Aurora, a lot harder than it will hit wholesale warehouses like Supreme.
• International sales just got real important. While Canada may be a seven customer town, countries like Germany, Australia, Israel and Brazil could go another way.
• Don’t get attached to edibles. While value-added products have been a nice way to make money at dispensaries across the country, you can guarantee other provinces will, like Ontario, choose to opt out of that market.
• Brands may become less important – or more so. Depending on whether the LCBO and others decide to focus on a selection of competing brands, or simply have growers farm a selection of strains selected by the buyer, the LPs may have to adjust on the fly.
• Advertising may be a thing: The liquor distributors won’t want to handle marketing themselves, and will likely ask the various producers to compete for shelf space by marketing their own brands at their own expense, as happens now. Currently, federal rules don’t allow for this, but that may change on a provincial level.
• As we steam towards Ontario’s new dawn, the LPs will be in a race to grow as much as possible, and SELL as much as possible, at the best price they can get, before the government comes in to set an artificially low rate in a year.

Dispensaries are done. There’s no talk anywhere that involves allowing dispensaries to do business as of now. Sure, a public/private mix works in liquor stores, and most public liquor store employees couldn’t point you to a sassy inexpensive red if their lives depended on it, but that embracing of the private sector didn’t happen for decades. And the unions will make sure it doesn’t happen for decades more.

Dispensaries that have done right by their municipalities, got their permits, kept their records, have clean books – those guys may get a second life, but only in as much as it makes sense for the government bodies to purchase those thriving businesses and merge them into the Borg, rather than kick in their doors and burn them down. Their patient lists remain valuable and dispensary owners will, as of today, be actively looking to cash them in.

On the customer side, you will undoubtedly find this new era to be frustrating. The one thing no Canadian liquor distribution organization offers today is a smart, helpful, full customer experience. In BC, liquor rules are archaic and choice stunted by what the liquor distributors deem worth selling. elsewhere, interstate sales are prohibited. Mail order requires signatures and registered mail and no packages left at the door.

And the cost of retrofitting every government liquor store across Canada with safes and new retail displays and separate counters and trained new employees and new stores entirely – that’s going to be passed on to you.

So you’ll pay more for less selection, the growers will get less for more customers, and the government will get its slice of tax.

And Jodie Emery will keep whining on Twitter that she’s not allowed to play.

Opening 25 illegal storefronts is the definition of organized crime, Jodes. Ya got greedy. Now they’re taking over.

— Chris Parry ™ (@ChrisParry) September 8, 2017

Merry Christmas.

— Chris Parry

FULL DISCLOSURE: Abcann and DOJA are Equity.Guru marketing clients but have not paid for inclusion in this article.

 
NB: Doja Cannabis (“DOJA”) announced a name and symbol change on January 30th, 2018 as a result of its merger with TS Brandco Holdings Inc. (“Tokyo Smoke”). Effective 31 January 2018, the company trades as Hiku Brands under the ticker symbol HIKU.C