Around October of last year, the legal cannabis industry reached a turning point in Canada’s most populous province.
For the first time, the price of pot from the provincial wholesaler, the Ontario Cannabis Store, dipped below the average price on the illicit market. According to the latest quarterly report from the OCS, that gap has continued to widen . The average gram on the OCS.ca is now $6 versus $8.51 on the illicit market and $8.28 at brick and mortar retail shops.
“The majority of Canadians care only about price,” Raj Grover, the CEO of Calgary-based High Tide, a retail-focused cannabis company, tells The Growth Op . Grover draws that conclusion not only from research that High Tide has conducted but also from industry analyses and reports, like the 2020 Canadian Cannabis Survey , which highlighted that price is the most important factor driving purchasing decisions.
Last month, High Tide announced it was transitioning its 100-plus stores across Canada to a cannabis discount club concept — think Costco — with exclusive benefits for its more than 245,000 members. And while lower prices are a win for consumers, for smaller retailers, who don’t have the same sort of capital or corporate backing, it presents another challenge in an increasingly saturated market.
High Tide had a number of advantages at its disposal in switching its Canna Cabana retail stores to a club model. Mainly, they are not new to the industry. For nearly 12 years, High Tide has been making and selling cannabis accessories to wholesale clients and retail customers. Its retail segment includes brands like Grasscity.com, SmokeCartel.com, DailyHighClub.com as well as wholesalers Valiant Distribution and Famous Brandz.
High Tide also owns Blessed CBD out of the U.K. and Fab CBD out of Wisconsin.
“Just like the Kirkland Signature (a private brand by Costco), we make our own accessories,” Grover says.
That distinction is one element that separates High Tide from other retailers. With the discount club concept, the company offers accessories to Canna Cabana members for up to 70 per cent off. And though consumption accessories make up about one to two per cent of sales for most retailers, for Canna Cabana it’s closer to 4.5 per cent, and Grover expects that to rise.
“We see this increasing now with the club concept because we are going to shut down the sale of consumption accessories in Canada so we’re going to make it very exclusive to Cabana club customers only,” he says. “Wholesale is very much a secondary business for High Tide and now given the opportunity to create this club environment we’ve carved out these accessories only for our members.”
Canna Cabana still acquires its cannabis products from the same provincial wholesalers as everyone else, but they are able to offer steep discounts to compete on volume of sales rather than the margins.
In mid-April, the company began piloting the club concept at three stores, offering exclusive discounts on THC and CBD products, as well as accessories. Over a six-month period, the sales of THC products increased 100 per cent, accessories by 184 per cent and loyalty by 227 per cent, Grover says.
Ultimately, he adds, the plan is to convert customers who still rely on the illicit market into the legal system.
“About 50 per cent of our sales are still happening in illicit channels. It’s not good for our company or for the market in general, or for the consumer in general, because these products are not safe, nobody’s doing testing of these products,” he says, adding that he would “welcome other legal retailers to come into the value segment to take down the illicit market quickly and efficiently.”
Late last year, the company began rebranding its stores in Ontario, Alberta and Saskatchewan as Value Buds. Bright and airy, the locations hold huge inventories and sell most products below the prices available from the provincial wholesalers. A recent visit to a Toronto location, for example, advertised 28-grams of Broken Coast’s Stargazer for $186.97. The same product is listed for $249.95 on OCS.ca.
Darren Karasiuk, the chief executive officer of Nova Cannabis, declined to comment for this story ahead of the company’s Q3 earnings report, but in August he said the conversion to Value Buds was allowing the company to acquire “market share at an aggressive pace.”
“In two months from conversion, our Value Buds stores are already operating at an average sales on an annual run-rate basis of $3.5 million which is, in our estimation, at least three times the sales volume of the average Alberta cannabis retailer,” he said in a statement.
“Value Buds is clearly resonating with Alberta cannabis consumers and drawing customers from the illicit market as well as legal cannabis retailers. All signs suggest that our high-volume value-conscious consumer strategy is disrupting the market, and we expect to benefit disproportionately from the growth tailwinds in our markets.”
Nova is majority-owned by Alcanna Inc., Canada’s largest private liquor retailer, which was acquired by Calgary-headquartered Sundial Growers in October in a $346-million deal. That deal follows Sundial’s acquisition of cannabis retailer Inner Spirit Holdings , which operated more than 100 stores across six provinces.
The Alcanna deal is expected to close in December and will make Sundial a cannabis retail leader in the country, owning or operating more than 170 stores.
In September, Ontario passed the 1,000 store mark, a measure that OCS interim president and CEO David Lobo warned about in the OCS’s 2020-2021 annual report.
“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 right-sizing,” he wrote in the report’s introduction. “Other retail stores may choose to participate in mergers and acquisitions to increase their size and scale, and presumably drive down their operating costs. However, at the core, all retailers will be challenged to further drive a relentless focus on targeted consumer segments and differentiating themselves from others.”
Some independent retailers, like Axes Smoke Cannabis , have already felt the pressure of “market right-sizing.”
In an effort to stand apart from its competitors in the area, Axes had dedicated its interior wall space to paintings, photography and mixed medium pieces from local artists. The kind of neighbourhood touch that smaller retailers can provide.
“I figured, why not let people influence the interior of our store since we’re influencing the city and Queen Street with another cannabis store?” shop manager Jessica Zepeda told The GrowthOp earlier this year.
But it wasn’t quite enough. In August, the store announced it was closing and it began clearing out its inventory, offering products at a 30 to 50 per cent discount. And though those sales quickly drew a crowd of price-conscious consumers to the shop, ultimately both the discounts and the customers arrived too late to save it.