Ontario lottery for cannabis retail stores to trigger ‘feeding frenzy’
August 22, 2019


The On­tario gov­ern­ment is fac­ing fresh crit­i­cism over its cannabis re­tail roll­out after a sec­ond lot­tery to award store li­cences led to clus­ters of win­ners in small ar­eas and shut out es­tab­lished re­tail­ers.

On Wed­nes­day, the Al­co­hol and Gam­ing Com­mis­sion of On­tario an­nounced 42 win­ners of the right to ap­ply for cannabis re­tail li­cences across five re­gions in the prov­ince. In­dus­try ex­perts and ex­ist­ing pri­vate cannabis re­tail­ers said the re­sults show that the gov­ern­ment has failed to ad­dress prob­lems that arose after the first lot­tery in Jan­uary – and pos­si­bly cre­ate new prob­lems.

“We are go­ing to see another feed­ing frenzy where you have these golden ticket win­ners out there, es­sen­tially auc­tion­ing off their ticket to the high­est bid­der,” said David Phillips, for­mer pres­i­dent of the gov­ern­men­towned On­tario Cannabis Store and cur­rent gen­eral coun­sel and prin­ci­pal of com­mu­ni­ca­tions firm Nav­i­ga­tor. “That is some­thing we will likely see play out over the next week or so.”

No es­tab­lished re­tail­ers were picked in the draw.

Nine months ago, there were le­git­i­mate con­cerns around sup­ply, but those just com­pletely do not ex­ist to­day. Frankly, it es­capes me how we are still in the busi­ness of do­ing lot­ter­ies ver­sus build­ing this in­dus­try in a thought­ful way. TOM DYCK CHIEF EX­EC­U­TIVE OF MIHI

After 25 mostly first-time busi­ness own­ers won the first lot­tery last Jan­uary, es­tab­lished cannabis re­tail­ers paid win­ners mil­lions of dol­lars for the right to put their brand names on their stores and, in some cases, to ac­quire the busi­nesses when reg­u­la­tions al­low. The bar­rier of en­try was raised for the sec­ond round – ap­pli­cants had to se­cure a suitable re­tail space and $250,000 of work­ing cap­i­tal in ad­vance, com­pared with just a $60 en­try fee for the first draw. Fewer than 5,000 ap­pli­ca­tions were sub­mit­ted this time, com­pared with more than 17,000 in the first round.

Some ap­pli­cants had al­ready signed deals with ex­ist­ing re­tail­ers be­fore the sec­ond draw, Mr. Phillips said, but added: “I don’t have any doubt that a sig­nif­i­cant num­ber of [the] win­ners are not aligned at this point in time and will ac­tu­ally be out there shop­ping around.”

Win­ners must now sub­mit ap­pli­ca­tions, li­cens­ing fees of at least $6,000, and a $50,000 let­ter of credit to the AGCO by Aug. 28. All told, the sec­ond lot­tery had 4,864 sub­mis­sions from about 1,800 in­di­vid­u­als or firms.

While the process was de­signed to be ran­dom, most of the win­ning ad­dresses were as­so­ci­ated with mul­ti­ple lot­tery sub­mis­sions, sug­gest­ing ap­pli­cants worked to­gether to im­prove their odds. One suc­cess­ful ad­dress in Oshawa – which was drawn twice – was on 169 dif­fer­ent sub­mis­sions.

Thirty of the 42 re­tail lo­ca­tions drawn were on more than 10 sep­a­rate ap­pli­ca­tions, lot­tery data show. Only seven win­ning ad­dresses were on a sin­gle ap­pli­ca­tion.

One pro­posed lo­ca­tion in Toronto – 104 Har­bord St. – is the ad­dress of a well-known il­licit cannabis store called CAFE Cannabis. AGCO spokesper­son Ray Kah­n­ert said the agency will con­duct el­i­gi­bil­ity as­sess­ments as ap­pli­ca­tions are sub­mit­ted, adding that reg­u­la­tors “may con­duct po­lice and back­ground checks on ap­pli­cants and per­sons in­ter­ested in the ap­pli­cant, as needed.”

The AGCO also posted wait­ing lists for each re­gion, and Mr. Kah­n­ert con­firmed that if the agency finds any of the lot­tery win­ners in­el­i­gi­ble, their right to ap­ply will go to the first name on that list.

Lack of rules for how close pro­posed cannabis stores can be to each other also led to a clus­ter­ing of sites around the most pop­u­lar re­tail ar­eas. Five of the 13 win­ning ad­dresses in Toronto are along the Queen Street West shop­ping strip, which al­ready has two le­gal cannabis stores.

In ad­di­tion, three ad­dresses in

In­n­is­fil near Bar­rie were drawn in the lot­tery that are all close to­gether on a ru­ral road.

After the Pro­gres­sive Con­ser­va­tive gov­ern­ment aban­doned its pre­de­ces­sor’s plan for gov­ern­ment-run stores, it had planned to use an open li­cens­ing sys­tem, un­der which any­one can ap­ply.

How­ever, a sup­ply short­age in late 2018 forced the prov­ince to adopt what it called a “phased ap­proach,” which spawned the lot­tery.

“Nine months ago, there were le­git­i­mate con­cerns around sup­ply, but those just com­pletely do not ex­ist to­day,” said Tom Dyck, a for­mer Toronto-Do­min­ion Bank ex­ec­u­tive who is now chief ex­ec­u­tive of mihi, an as­pir­ing cannabis re­tailer that has been hold­ing leases on 30 empty lo­ca­tions since the start of this year. “Frankly, it es­capes me how we are still in the busi­ness of do­ing lot­ter­ies ver­sus build­ing this in­dus­try in a thought­ful way.”

His staff is try­ing to make con­tact with lot­tery win­ners “who are in­ter­ested in our ap­proach to re­tail­ing,” Mr. Dyck said.

Two lot­tery win­ners have al­ready con­tacted Cal­gary-based Canna Cabana par­ent High Tide Inc., CEO Raj Grover said. “And we ex­pect many more to do the same,” he said, adding his com­pany struck agree­ments with three of the 25 win­ners in the first lot­tery – in Toronto, Hamil­ton and Sud­bury.

Ed­mon­ton-based Fire & Flower has put its name on two stores owned by first-round lot­tery win­ners in Kingston and Ot­tawa, and CEO Trevor Fen­cott said he is will­ing to dis­cuss sim­i­lar deals with the lat­est win­ners.

“While I would much rather be spend­ing cap­i­tal build­ing stores and em­ploy­ing peo­ple and ac­tu­ally com­bat­ting the il­le­gal mar­ket rather than pay­ing out On­tario lot­tery win­ners, the re­al­ity is we are in busi­ness and that is the sys­tem that, un­for­tu­nately, we have in On­tario, so of course we will need to have those con­ver­sa­tions,” Mr. Fen­cott said.

Mr. Phillips said he has a “high de­gree of con­fi­dence” On­tario will move to open li­cens­ing soon. How­ever, Je­nessa Crog­nali, spokesper­son for On­tario At­tor­ney-Gen­eral Doug Downey, would say only that “the gov­ern­ment is work­ing with the AGCO and On­tario Cannabis Store to re­turn to our orig­i­nal plan to al­lo­cate re­tail store li­cences based on mar­ket de­mand.” She did not pro­vide a time­line.

The new stores, set to open as soon as Oc­to­ber, are in ad­di­tion to the 25 al­lo­cated in the first lot­tery and the eight re­cently dis­trib­uted to First Na­tions on a first-come-first-serve ba­sis, bring­ing the to­tal to 75 stores ex­pected to be open by the end of this year.

Written by: Vanmala Subramaniam
Source: Financial Post