TheCannalysts have covered both High Tide ($HITI) and Meta Growth Corporation ($META) extensively.

We’ve also seen that retail ‘as-is’ in Canada isn’t bringing back margin hand-over-fist, nor has the speed in permitting and store openings been at the pace required to get to scale – whatever size that ‘scale’ might ultimately be. We can say looking across the current landscape that – as it stands – the ‘scale’ a retailer will need is a number far greater than 50 stores at this point.

So, with $HITI’s 33 outlets combining with $META’s 30+ – they’ll become the largest retailer in Canada by store count and revenue. The plan is to have 115 store open by the end of next year,

It could be seen as pithy to say that retail consolidation is inevitable, but Canada’s revenue numbers haven’t shown the profitability or moats that limited license jurisdictions provide in the US. Even in Ontario – where lottery winning first movers were seeing store permits valued north of $10MM in early days – the ACGO’s State Monopoly forces companies into chasing higher sales volumes to make up for the profit being leeched out of the supply chain. Smaller retailers (like say, a ‘YSS’) lack the capital depth to withstand a few missteps…..or the agility to have stores re-sited.

And yep, this brings up the other large non-LP player in Canadian retail: Fire & Flower ($FAF). We’ve been interested in Fire & Flower for reasons similar to the others, as the option Couche-Tard bought (and recently re-priced) has presumeably removed concerns about capital availability from CEO Trevor Fencott’s desk. For $FAF – and now $HITI/$META – the question has always been: ‘How many stores do you need to support your capital structure and create positive returns?’

This is the second big deal we’ve seen in retail (after that Couche-Tard entry), and I strongly suspect there’ll be more. Alberta’s success in developing the industry has led to more than 500 stores in the province now, which also has the Raj’s and $META CEO Mark Goliger’s of the world looking to be expanding anywhere other than there.

I can see Raj over spring/summer wondering how to get into Ontario. While he has 7 stores now, does he hold out and wait for organic store openings to occur, or, does he do a deal to expand a footprint in the province? This deal answers that question, and signals that he views having cash as critical for retail at the moment. We’ve heard $HITI (and others) decry the lack of capital that legal cannabis is struggling with – yet……ATM programs of several large producers are moving dollars into them, as is occasional private placements, while Canaccord and 8 Capital and Green Acre appear to be doing deals regularly (even if at a slower rate than a year ago, and at very high price).

The idea behind scale is all in cost: uniformity in store deployment; regional preferences known and integrated into store offerings; hard demographic and sales data collection/monetization; and access to cheaper capital. Retailers this year have been facing challenges in all of these. The industry has little formalized history, the consumer is bearing out to be fickle on price and quality, and raises by any and all retailers stare at 7% commissions and be asked for buckets of optionality – just to get enough for a quarter or two of expansion-driven burn rates…..and maybe have enough for a planned store (or 3). It hasn’t been an easy go.

It means to me: the ‘retail’ link in the Cannabis Value Chain is being treated differently by capital markets. Retail is notoriously thin on margin, as competition seeking consumer cash walk a thin line between choosing whether to compete on price, or not. With a hard cap on margins appearing to be in the mid 30’s – the State Monopolies have retail effectively boxed in – forcing them to seek volume. And volume is driven by scale.

Through this lens, it’s easier to see the haircut Couche-Tard gave $FAF’s shareholders, as $ACT keeps it’s financial model of $FAF whole (cynically, one could say earlier shareholders in $FAF simply got there a little too early).

And it’s also clear that this was an acquisition: for Raj, finding more stores to put his wholesale product lines into is strategic, and for Goliger, it’s a far better option to still be able to negotiate for something rather than being told what you’ll do by creditors. I suspect having multiple brands (NewLeaf, CannaCabana) makes it easier to test and deploy products, and demographics can be parsed and pathed.

The devil is in the details, and I gave SEDAR a couple of days, hoping the proposed acquisition documents would have been posted…..sadly they aren’t. I’ll revisit this when they do drop, because economic adjustments within it will be extremely useful to see what the companies saw in the deal for themselves – and what they wanted. I want to look at the combined capital structure and consolidated optionality: they are promising ‘synergies’ and improved margin and all the good stuff, but acquisitions are different than mergers, and $HITI has a great opportunity to do some housekeeping with it.

My reaction around this is largely good (I want to see the details), but TheCannalysts have documented the challenges retailers face, and there are many. Scale is seen to be the way forward. Other outfits like Inner Spirit (good lord, don’t get me started…..it’s an utter mess) and YSS (small, regional) aren’t showing much prowess. I suspect Grover/Goliger have been on this deal for months, and this acquisition will feedback into the sector.

This deal itself could be seen as a reaction to $FAF’s move into Circle K’s – which wouldn’t surprise me at all. Look for more news out of retail during the remainder of this year – and I’d guess one more retailing ‘big one’ to come into sector….and further drive consolidation. It’s the only way forward for the chains.

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 a position in $HITI, and apparently, $META. soon.

EDIT: SEDAR now has the $META acquisition contract up. And…. High Tide’s CEO Raj Grover is doing an ‘AMA’ on Reddit. It’s a great platform to ask questions of leadership, and answers (or non-answers) can provide a good look into the mind of management. Here’s what I asked. Raj spent some time as a panelist and sponsor at our last WeCann® event in Edmonton.