Weed Has Been Deemed Essential and Demand is Recession-Proof. So Why Do Retailers Still Struggle?

Article by Kate Robertson, Growth Op

SMALL BUSINESS Weed has been deemed essential and demand is recession-proof. So why do retailers still struggle? Let's look at all the challenges facing cannabis retailers as sales come back down to earth By Kate Robertson  File - At one point, Mihi planned to open 10 stores in Ontario. None have opened as of May 20, 2020. Rendering: provided  In a since-deleted tweet, Mihi’s twitter account posted that “the sun is setting” on the company on April 2.

Three weeks before the pandemic sent Canadians into a state of emergency, executives at cannabis retail hopeful Mihi were celebrating. After two years of planning, hiring and strategizing, the Ontario-based company was awarded a cannabis retail operating licence by the Alcohol and Gaming Commission of Ontario (AGCO). The plan was to open its first location in the spring.

Just eight weeks later, after reports of skyrocketing cannabis sales by consumers in lockdown, the company announced that those plans had changed.

“Today Mihi says goodbye to our dream to bring a different kind of retail experience to cannabis consumers,” the company posted on April 2 in a since-deleted tweet. “So proud of our team, their passion and perseverance until the very last minute, they never gave up.

“The sun is setting on Mihi but we have no regrets!”

In a follow-up exchange this week, CEO Kevin Reed didn’t say why that first store hadn’t opened as planned — whether it was related to licensing, investment or something else entirely — but clarified that the company has not yet officially shuttered. “I would state that there is no demise of Mihi,” he wrote, but declined to elaborate until a later date.

In late April, the AGCO continued to approve a backlog of approximately 900 retail operation applications for bricks-and-mortar storefronts, according to MJBizDaily.

Once an operations licence is approved, specific store locations have to be authorized, with a window to solicit feedback from the community. That process resumed late last month after temporarily ceasing for the lockdown. As of May 20, more than 90 stores were in the public notice phase.

But what kind of marketplace will greet these new stores? As if the pre-pandemic landscape didn’t present enough challenges to the purportedly recession-proof industry, these retailers will also have to navigate their way around new and unexpected obstacles.

Brazen black market

The illicit market represents one such challenge.

Fire & Flower CEO Trevor Fencott says he checks cannabis listings site Weedmaps every day to see if more or fewer illicit mail-order and delivery sites have popped up on the site.

He suggests that when the province announced cannabis stores would close, illicit sellers felt emboldened to advertise, listing their services on the site and disseminating flyers. Fencott says, “One illegal competitor called CAFE … actually put out a press release on the CNW newswire saying, ‘We look forward to serving you in this pandemic.’”

The province reversed its decision shortly after, and eased restrictions to allow stores to deliver and offer curbside pickup. “I think that was kind of the last straw — when your illegal competitors are advertising, putting out press releases,” he says.

Fencott believes the illicit market has likely eaten up a significant chunk of the pandemic’s increased demand for weed, leaving some retailers in a tough position. “I definitely think that there are a lot of cannabis retailers that are going to be struggling,” he says.

Competing with the government

After the illicit market, the second-biggest challenge facing retailers is the Ontario government.

OCS.ca operates independently of the AGCO retail licensing body, but is subsidized by taxpayers  — 52 employees made this year’s Sunshine List. The OCS is also the sole supplier of cannabis inventory to retailers. They can’t buy or negotiate directly with any other suppliers.

A recent Reddit post highlighted the price differences between products at the OCS vs. those at competing bricks-and-mortar retailers. Those at brick-and-mortar shops were consistently higher, causing some members of the community to accuse retailers of greed.

Fencott says that’s not necessarily it. In addition to markups on the retail side for revenue, he says the provincial wholesaler puts products on sale after selling it at a higher price to retailers. “We are legally obliged, because they’re the monopoly wholesaler, to buy from them,” he explains. “And then they lower the price.”

The OCS disputes this claim.

“Stores are our partners in growing the size of the legal market, not our competition,” said director of communications, Daffyd Roderick, in an email. “Our pricing model is designed to not undercut stores … If we raise or lower prices on OCS.ca, stores always receive the same consistent markdown. And we give them notice of any reductions in advance.

Fencott also says in-demand 2.0 products like drinks and edibles are in short supply to retailers. For example, Fire & Flower was unable to acquire infused beverages for its customers, he says.

Tokyo Smoke, which is owned by Canopy Growth, says those new smokeless products opened up a previously untapped market. “New product categories have definitely brought a new category of consumers into our stores — people who are curious about cannabis products and how cannabis might fit into their lives, but who wouldn’t necessarily purchase traditional formats like flower,” says director of franchising Melissa Gallagher. “We’ve seen a ton of interest in chocolates, gummies, and beverages — and increased sales for products like softgels.”

With limited inventory on those items, however, it’s difficult to continue to grow that customer base and provide appealing products on a consistent basis.

Cannabis deserts and shifting regulations

Increasing the degree of difficulty for retailers in the province are the changing regulations. Because delivery and curbside pick-up wasn’t an option before the pandemic, not all retailers were equipped to handle and process online transactions, particularly ma- and pa-type shops.

Third-party software companies like Dutchie, Super Anytime and Leafly have launched services to assist retailers with processing payments and fulfilling orders, but they are still establishing a presence in the province, and not all retailers have signed on.

Furthermore, online transactions aren’t available to all buyers — some customers have privacy concerns with the illegality of cannabis beyond Canada’s borders, and others simply prefer to deal in cash because that’s how they bought weed pre-legalization.

David Clement, North American affairs manager at the Consumer Choice Center, says he hopes the province makes the delivery and curbside allowances permanent, with some tweaks. He says delivery people have to be licensed employees of retail stores, which is a barrier for store owners. And if delivery isn’t made permanent, these stores won’t be able to serve customers in “cannabis deserts.”

He cites Oakville, Ont. as an example. Bricks-and-mortar stores aren’t allowed in the Toronto suburb, so before delivery allowances, buyers had to choose between waiting for orders through OCS.ca or the illicit market — even though there’s a store in nearby Burlington that is happy to conduct same-day deliveries to Oakville customers.

“Some local governments are still holding firm on their ridiculous prohibition mentality,” he says. “Oakville is still prohibiting cannabis retailers, which is ridiculous. It’s a ridiculous policy because cannabis is a legal product. But it’s increasingly ridiculous because banning or prohibiting retail outlets in Oakville does not mean that consumers in Oakville are not buying cannabis.”

Read the full article here.

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