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Life After the Cannabis Lottery

Life After the Cannabis Lottery

In January 2019, the Alcohol and Gaming Commission of Ontario (“AGCO”) pulled the names of twenty-five lottery applicants …. And then the gun went off on the race to open a store.

In July 2019, the ACGO has kicked off the second round of lottery with the prize being fifty stores to be awarded in August 2019.  

What is the difference this time around? And what does a previous lottery winner have to teach the upcoming winners of the cannabis lottery about their path forward? I sat down with Steven Fry a Western Ontario winner that located in Hamilton under the Canna Cabana banner (“CC” is owned by HighTide $HITI), and Alex Mackay the Chief Operating Officer of CC to discuss how everything went.

Last time all you needed to enter the lottery was $75 and an email address.  Fill out the AGCO Application and submit it online.  Very low barriers to entry, which attracted 59,069 applicants, given applicants a 0.04% chance of winning. Of note, only three of the 25 winners were incorporated entities.

This time, using the learnings from the first round of cannabis lottery, the AGCO has added some additional conditions.  Along with your AGCO application and $75 you will also need the following:

This was quite different than the proverbial “chip and a chair” requirements of the first lottery.  While it is still not merit based award on the ability to successfully run a cannabis retailer, the AGCO clearly saw the above as the friction points the first time around. 

These new application requirements will likely significantly curtail the number of applications this time around. But one thing the requirements does do is weed out those applicants without the capacity to handle these pretty ordinary business requirements.

The first question I asked Steven Fry (who is a pretty well accomplished MBA and VP of a provider to the health care industry, overseeing a half a billion dollars in procurement, with a side real estate business) was: Would you have entered this time with the new requirements?

Steven answered that, while he had the capacity to provide all the requirements, he likely would have sat out as these barriers to entry would have been a hassle.  Last time Steven spent eight hours reviewing the regs and rationalized “why not?”.  This time the barriers to entry would have had him on the sidelines.  Steven actually has a friendly bet with someone that this time through he would expect under 2,000 applications.

After Steven was informed by the AGCO that he won his phone and email started lighting up with well wishes and interested parties wanting to talk.  The biggest rush though was getting a Standby Letter of Credit issued by a financial institution within five days as he was starting flat footed.  I used to work for a bank and a $50,000 Standby Letter of Credit secured by cash does not happen overnight.

He quickly realized the banks were not going to of help as their Anti Money Laundering requirements were extensive. [I saw Bank of Montreal’s AML requirements and the list was as long as my arm].  He ended up at Alterna Savings and Credit Union and got the $50,000 Letter of Credit issued.  But there was a problem, last time around Credit Unions were not explicitly allowed to provide the Letter of Credit, as they are this time.  So Alterna need to re-issue from Alterna Financial. 

The AGCO was immovable on the requirement for the $50,000 Letter of Credit within five business days. Non-provision of the Stand-By LC was immediate disqualification.

With the Standby L/C in hand Steven could now focus on other matters. One of which was getting to know every Western Ontario Region winner, of which he was one of seven.  Steven wanted to figure out where each of the other six would locate, so he wouldn’t locate close to them in order to maximize his store’s sales area. 

Last time around the lottery winners by region had a blank slate as to where they could locate within that region (West Region: Niagara, London, Kitchener, Guelph through to Windsor).  This time around applicants are having the fun task of convincing a landlord to allow them to lease the building for a cannabis store at a future date in the off chance they win the lottery.  

If the landlord believes commerce is greater than cannabis stigma you might just get a call back.  Many landlords do not want anything to do with a cannabis store.  The ones that do will try and get a down payment for giving the applicant the “option” to rent the store space.  Other landlords are reportedly jacking rent costs and asking for a success fee if the applicant wins.  Some landlords are taking multiple applications for the same store.

Steven, with a wide-open slate in his region considered London, Kitchener and Guelph, and his sleuthing and relationship building paid off as he was close to locating in London.  And as it turned out it would have been four hundred meters from another store.  Steven reduced his search to the Hamilton area, home of 87 illegal dispensaries pre legalization.  The area, with the well-earned title of Hamsterdam, was a demonstrated thriving cannabis market and none of the other applicants were looking at Hamilton.

The other applicants have located in Niagara Falls, St. Catharine’s, London, and Burlington.

During his searching period, Steven was working twenty-hour days and meeting with several suitors that wanted Steven to work with their brand.  A meeting at 4 am at Tim Horton’s was not out of bounds.  Offers were wide ranging and Steven’s “Primary Objective” was not to put his license at risk. [Knowing that he ended up working with Trina Fraser of Brazeau Sellers, I can see her saying this to him, repeatedly.]

One of the biggest obstacles for Steven was going to be sourcing the cash for the venture without liquidating his holdings in an untimely and hasty manner.  A partner of some sort was a must.  And the partner had to fit Steve’s Primary Objective, while providing a good brand, the capital and some know how.

Steven is pretty confident in his ability to source the makings or a store given his procurement background and his familiarity with real estate.  But as he put it, ordering the first order of inventory from AGCO, a one time 100 kg order, would have set him back over $1 million.  That is in addition to AGCO fees and permits ($10,000), legal (approx. $50,000), insurance (approx $40,000), leaseholds (approx $200,000) and other expenses. Steven was quoted on an Ask Me Anything on r/TheOCS as saying he was into the store for $1.0-1.2 million by opening. The AGCO requires a $10 million insurance policy. I would love for someone to let me know what the policy is for a liquor store or bar.

He had many suitors to “partner” [notice the small”p’]. All the well-known names came through. CC was a good fit for him.  Established brand based in Alberta with experience opening stores. CC is opening a store a week right now, although Steven and another store in Sudbury was CC’s first go round with Ontario’s new regs.

CC was also offering financing, which was core requirement of Steven.  He didn’t disclose interest rate buy he did say “private financing isn’t cheap, and the banks wouldn’t lend to a cannabis retailer”.

CC has partnered with three Ontario lottery winners: Steven in Hamilton, Sudbury and their latest store in Toronto on Yonge Street.  Both Steven and the Sudbury store opened on April 20, 2019, missing the AGCO imposed deadline by two weeks.  That miss cost Steven $25,000 of his letter of credit as a fine. This time the AGCO has not put a timeframe up to date on store opening dates, although you must have access to run the retail premises no later than October 1, 2019.

One of the requirements for the AGCO was you couldn’t change the ownership structure of the applicant.  So, if the applicant put the application in his/her own name they won as a “sole proprietorship”. Steven was a Sole Proprietorship.  Steven couldn’t swap equity with CC or any other suitor and the application had to remain in his name.  Sole Proprietorships are a risky venture as there is no fire wall between the business going bad and the person getting sucked into that vortex.  Sole Proprietors have everything they own on the line.  Guy buys weed from your store and crashes and kills himself… the Sole Pro is on the line (with their insurance).  That is why most companies and ventures are incorporated to reduce personal liability risk.  [The AGCO is letting Steven incorporate but he has to pay the $10,000 in AGCO fees AGAIN to re-issue the license. This IMO is solid of the AGCO, as there is no need for these folks to be at personal risk.]

CC was successful in securing working with three lottery winners, which is tied with Tokyo Smoke for most lottery winner agreements, as they were flexible with each winner.  They listened to what the winners were looking for from the process and adjusted their deals accordingly.  Steven indicated every suitor approached from a perspective that they wanted to own the store outright in the future. 

CC has multiple agreements with each lottery winner: Royalty agreements, profit sharing, IT, subleases….  CC states that the lottery winners have full control over each of their stores.  Alex points out, “CC license the CC brand and the operational expertise”.  CC is more prepared this round of the lottery to attract lottery winners, as they now boast experience with their three winners plus they have store design and feel, millwork, and all the IP needed to open a store. Steven had mentioned at one point he had called CC head office and ask for some immediate support due to the bustling store, which was delivered. Their store buildout and operating teams now stay with the new store for ten days after open to ensure the processes including re-ordering are going well. 

The location of the store was still up to Steven, and he wanted to open by April 1, 2019 and not absorb the fine.  He signed with CC in mid February 2019. CC had locked down a location, before the Ontario Government changed course with the lottery, in downtown Hamilton.  He ended up in a location outside of the downtown core in a very high traffic mall on Barton Street East in Hamilton.  Tenants include Canadian Tire, Staples, A&W, Giant Tiger…. But with a big mall comes a big landlord and big lawyers.  [And notably, there was a grey market storefront closed down a block away].

Alex of CC indicated that across the three stores the AGCO was reasonably consistent in the licensing process, more so than the municipalities and the permits required from them.  CC Hamilton had regulatory approvals by March 3, 2019.

Steven picked his location and CC provided layout, colour and feel for the 2,500 square foot store. Steven leveraged CC architect and instead of sourcing pre fab mill work from Alberta he contracted for same locally. CC stores range from 1,200-2,000 sq feet per store.  The sweet spot is 2,000 square feet.

Steven tried his best to open by April 1, 2019 but too many things, including municipal permits, were outside of his control, and he opened April 20, 2019.

 

 

I had also visited the Niagara Herbalist and Choom while I was in the region.  CC stores are set up markedly different.  The other two stores had all their product behind checkout counter in drawers.  Customers would check the “daily/weekly sheet” or the ipads, and hit the sensory jars [All the product smelled like hay IMO], and then line up bank style.  And the lineups were fairly long.

CC uses a series of fishbowls where all the product is displayed.  As well as service counters with paraphernalia stocked.  The fishbowls are locked and require staff interaction. CC Hamilton had six fishbowls divided into Oils & Gel caps, Hybrid, Sativa, Indica and the “On sale” [retail secret… what they have the most of and the best deal to move it is always by the front door.  Trailblazer Glow at $28 for 3.5 grams was stocked, as was the vault.]

To me the staff interaction is the BIG difference between CC and the other store in the region that I visited.  If you know what you want you can get in and out effectively.  If you need help, as many first timers do, the staff shops WITH you.  To me, if you have a customer in line you should be giving them something or someone to interact with.  Both Choom and the Herbalist had line ups with only a few islands at Choom for those in line to interact with.  Herbalist had just the line.  This is a waste IMO of an opportunity to gather more intelligence from your customers.

Emmett the CC Hamilton manger indicated that they get an order once a week (Tuesday morning when I was there) from AGCO.  They try and order what is selling well but they are limited in quantity of certain SKUs they can order at a time (eg. BCC Quadra is capped at 3 boxes).  With the 25 kg weekly cap removed for certain products, and not knowing if that was a one week or permanent, they ordered a lot of additional product.

One nice thing the staff does is they always pull the product from the fish bowl and confirm the current THC (not the range) and the packaged on date.  They actually had removed a full display of Royal High as it was packaged in Oct/2018.  AGCO said to take it up with Royal High (United Greeneries) and Royal High blamed OCS for not moving product sooner.  Neither side solves the problem of returning the stale product and getting any credit to CC Hamilton.  I asked Emmett if he is seeing older packaged SKUs coming in on product that they had previously ordered, he hadn’t noticed that happening.  But he did point out that when OGI repackaged all their product with Boveda packs, they re-dated to the more recent “packaged on date”.

 

There was some lonely looking Up product that was slow moving at the price point that might not see a return to the store.  Broken Coast and San Rafael were staff favorites.  They had moved some of Seth Rogan’s Houseplant at a good clip but the buzz has settled down.  Oil and Gel caps aren’t moving as fast due to price point except CBD versions.

 

This store sells more grams than any store in Ontario, proving Molly’s adage of “all pot is local” yet again. 

The “Holy Grail” remains high THC at a good price point. Weed MD Ghost Train Haze was mentioned as one that moved well as it had a good price point.

Emmett indicated that the AGCO order sheet has increased by about 20% over the past few months.  While Alex of CC indicates that there is more variety at AGCO than in Alberta, but they are converging over time. The goal is to curate what the store wants without limits.

Canopy products were largely ordered to fill out the balance of the 25 kg per week order once they ordered all of their more in demand products.

The store typically moves 20-30 kgs a week which could equate to 1 TON of cannabis sales per annum. 

I asked Steven what he would do differently if he had the opportunity:

But his biggest regret is that he didn’t order the full 100 kg initial one-time order and went for 50 kgs.  While the move saved him a approx.. $500,000 outlay he did run out of product and had to trim store hours. Which lead to someone setting up shop in front of his closed store selling weed.

He also had two death threats.

Steven is disappointed he couldn’t throw his name in the lottery this time as the AGCO limited the lottery to applicants with no affiliation to an existing store.  He says he has a “PhD” in opening a cannabis retail store and would love to use that knowledge to open more stores.

Here is Steven’s impromptu Ask Me Anything on theOCS subReddit

Here is Molly’s post on HighTide Current State and Structure

That’s all I got.

GoBlue

The writer does not have a position in HighTide and doesn’t intend to start one for five days.