Cannabis Retail

Will Ontario’s Cannabis Retail Market Hit a Saturation Point?

When the sale of recreational cannabis was legalized in Canada, Ontario was slow to launch brick-and-mortar retail locations. While the government-owned online-only Ontario Cannabis Store launched right away, it was difficult to find a store to shop in, particularly in areas not close to Toronto. As of April 2019, Ontario lagged far behind other provinces, such as Alberta, which had 449 in-person stores compared to fewer than five dozen in Ontario.

A lot has changed in less than two years.

Since then, Ontario has significantly upped its approvals and as of mid-February of this year, regulators are issuing approximately 30 new licences per week. As of the same point in time, there were 430 authorized cannabis retailers open in Ontario, with over 900 applications still awaiting processing. According to projections by CTV News, Ontario is in line to have nearly 1,400 operating shops across the province by the fall, or 1 for every 10,000 residents. This is double the number of LCBO locations, although it does not count other retailers permitted to sell alcohol, such as grocery stores.

The accelerated growth rate of legal cannabis retail shops naturally leads one to question how many businesses the industry can sustain over the long run. The key to long-term success for retailers is customer loyalty, however, some retailers say the rules make attaining this difficult.

Regulations Make Customer Loyalty Hard to Come By

Customer loyalty is an elusive concept that every retailer strives for, as this type of goodwill is what enables a business to endure over months and years. To develop this loyalty, retailers need to find a way to stand out from their competition and offer something unique that customers will come back for again and again. But when retailers are forced to follow rigid provincial and federal guidelines, distinguishing oneself from the competition can be a challenge, to say the least.

Wholesale Monopoly Limits Pricing and Stock Options

All authorized retailers in the province are required to obtain their stock of cannabis products from the same wholesaler, which is owned by the province itself. This means every store has access to the same products at the same prices, limiting their options to offer unique pricing or products to customers. By contrast, in Saskatchewan, for example, retailers are permitted to negotiate directly with producers, which allows them to keep costs down. Further, there still exists a black market in Canada where unauthorized retailers are selling huge varieties of products such as edibles that are not available through legal means. The lack of regulation means these retailers can offer products, packaging and pricing that licenced retailers just can’t access.

Federal Advertising Rules

Similar to alcohol and tobacco rules, there are strict limits on how cannabis retailers can advertise their products and services. For example, advertisements can not be made to appeal to anyone under the age of majority in a respective province (19, in Ontario). Further, retailers are not permitted to use testimonials, including the ever-growing influencer market, to speak to the quality of any cannabis product. Instead, testimonials are required to focus on the brand over the product. Cannabis can also not be made to be associated with an appealing lifestyle or any medical benefits as part of any advertising campaign. While these rules are in place to protect young people and others, they do place quite a few restrictions on how business owners can get their brand into the collective consciousness.

COVID Protocols Create More Strain

COVID restrictions on all retail have made the in-person cannabis retail situation considerably more difficult as well. While most stores offer customers options to shop online and pick up purchases curbside, the legal cannabis business is relatively new and some customers need much more guidance through a transaction than other retail industries. A spokesperson for one Toronto retailer, speaking to CTV News, put it this way:

With a cannabis store, the products aren’t on display, it’s a relatively new product, so people need to spend the time on education. They don’t know the difference between a vape and an edible or a topical. There are so many different products. It’s a much longer transaction.

With some stores forced to close other than for online or phone orders, some customers may simply opt to purchase directly from the province’s online-only retailer, the Ontario Cannabis Store, or wait until stores reopen when they can get more information before purchasing.

Rules Force Shops to Get Creative

Some shops are looking to create unique services or offerings however they can. One store has purchased a press that allows them to press fresh cannabis flower into a concentrate on the premises, to order. They also will roll fresh flower to order for customers, and offer a price-matching option. However, due to advertising restrictions, they cannot communicate these services on their windows. And what’s the point of offering services to distinguish your store, if nobody knows about them?

For Skilled Guidance Through Ontario’s Cannabis Retail Industry, Contact GLG LLP in Toronto

At GLG LLP, our business lawyers provide a full range of services to Ontario’s growing cannabis industry. We advise clients with respect to licencing, regulation and operations for new and existing cannabis retailers and cultivators. To speak with a lawyer, please contact the firm online or call 416-272-7557.