I came across the ‘Friendly Stranger’ when I was in Toronto for a Lift back in 2018. I’d stopped in their flagship store on Queen Street, and spoke with staff about the upcoming legalization. They weren’t happy. The chain had been described to me as having an ‘activist’ footing. They’d been around for many years, and did what they could and keeping a smile on and being polite. Sort of like how Abi Roach did with the HotBox Cafe in Kensington Market – maintaining cordial relations with police and authorities, while quietly working to normalize cannabis. Great stuff.
Fast forward 2 years….Ms. Roach now works for Ontario’s State Monopoly (yep), a deal has been done to add the entire Friendly Stranger brand to Fire & Flower’s fleet (HotBox had already been sold to them almost a year ago), and now 2 big names from the legacy past will be owned by a retail conglomerate in Couche-Tard ($ACT) that reported global revenue of $9.107 billion. In their last quarter.
Like most $FAF press releases, this one makes it hard to keep up with what’s actually open and what isn’t. And when. Ontario’s made that hard enough to plan for as it is, and I can imagine the challenges of trying to deal within the politicized hash that is now supposed to serve as economic development in the province. The whole thing serves to me as testament of how poor governance really is in Canada. Anyhow – $FAF’s CEO Trevor Fencott has probably had enough frustration to last awhile, and I empathize with the reality he has had to deal with.
Barely coming 2 weeks after announcing the last shopping trip he took, the Friendly Stranger acquisition appears to be more expensive on a per store basis – with a total of some $25MM being paid for (what I can gather) 6 operational stores (not all carrying cannabis currently), as well as 4 planned and authorized locations to open by the end of this quarter.
The most notable thing to myself is how Fencott describes this specific deal:
“The acquisition will bring some of Ontario’s longest established Cannabis brands into the Fire & Flower portfolio, transforming us into a multi-banner operator that appeals to a larger cross-section of cannabis customers. We are also excited to add Friendly Stranger’s demonstrated expertise in the high-margin accessories business to our team.”
Straightforward to me. $FAF’s accessory sales are just showing improvements, and additional margin created beyond cannabis sales is what all retailers want. The more important bit is the contrast emerging between High Tide ($HITI) and $FAF in their business model. And, that this is a brand tweak for $FAF.
$FAF’s declaration is to be a ‘multi-banner’ operator is a different approach than $HITI’s singular presentation within a ‘Canna Cabana’. Barely days after $HITI’s acquisition of $META, CEO Raj Grover said he was folding the entire $META branding/logos/image and installing Canna Cabana frontage. $FAF is grabbing legacy land and perhaps trying to inject some authentic street cred into regions where it makes sense.
And it looks to be at a cost about double of it would to simply get an unestablished/or newer storefront. I can’t tell yet, the deal hasn’t been posted on SEDAR. I’ll look it up to see if there’s more than in the press release…there always has been. The deal also includes a $2MM low interest rate loan to Friendly Stranger in it – as it looks like there was a pursuit for another store already underway. Stranger is allowed to use the cash if they buy something before March 31st of next year.
Well, two retailers are stepping up ground game for who can become largest IN THE COUNTRY, and neither seem to have much concern for ultimate share counts. One might suggest that getting stores open and surviving takes priority to dilution, and I’d agree.
Oligopolies are formed when regulation creates barriers to entry, and when capital is required just to sit down at the table. Deep capital pockets will fill in the gaps – taking out the marginal mom & pops (perhaps starving them out by extending hours and selection), discovering and serving regional flavours based upon big data, and capturing the margin that only verticality can bring.
This is always the way it was going to be in legal cannabis.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds position only in $HITI.