Key takeaways from ‘Challenges facing recreational cannabis retailers’

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Cannabis Professional hosted a conference call to discuss the key challenges facing recreational cannabis retailers with special guest James Burns, CEO of Alcanna, parent of Nova Cannabis and Liquor Depot.

Thank you to the subscribers who listened in to this lively discussion. You can read a recap of the key takeaways below.

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Listen to audio of the call

• Or read the full transcript here

It’s all about location

James Burns: In retail, it is about one thing: location.

We are all selling the same stuff, be it running shoes, cannabis, liquor, there is very little differentiation in product for most of retail. There is high-end-low-end-middle-end but it is all retail.

It is all about location though. Stores that have been in existence, the few that were open when the moratorium came down three or four weeks after legalization and they stopped granting licences because of extremely low supply. Those stores would have great numbers wherever they were because there were so few.

If people wanted legal cannabis, instead of black market, they drove and found the store no matter how bad the real estate was, no matter if there was no parking. But when you have 500 stores that doesn’t matter anymore.

The people with the best locations on the high-traffic streets with parking with access and located in centres where people are shopping anyways – and those are expensive and owned mostly by big landlords and you need to have relationships – but that is where we are.

While there might be some speed bumps industry-wide, we are extremely confident that we will come out the other side stronger. We have the infrastructure and the financial size to be able to do that. Get 260-plus stores and we have 10 cannabis stores, 20 by the end of October and 30 by the end of November and that is still not a big number since it is less than 10 per cent of our network.

Retail in cannabis and other industries

CP: What differences, in terms of the pure business, have you noticed so far? Is there a difference in the average margins, average basket size, have you noticed differences for that yet?

JB: Cannabiswas dominated by the fact of whether there was any supply or not. You only sold what you happened to get. Which was what the government had available. And we made mistakes, like many retailers did. All that was really available, for much of the winter was oils and capsules. So we bought it. The customers didn’t want it at the price point we offered, so we chose to drop the price to the point that would get it off our shelves. All products – dried flower and different concentrations of THC as well as oils and capsules, and CBD which were almost non-existent for three months, is now readily available so it will change. The more stores that come, there will be margin pressure, probably.

So then, it gets back to location.

If you’re in the right place, where it’s convenient and easy, and a good environment for people to go, you’ll do a little better than in a location where someone has to come and find you.

“Nothing to compare it to”

CP: [W]hat about the $400,000-plus-per-week being generated by your sole Ontario location. How much better is that figure versus your expectations? It is your single highest-grossing store right now even compared to your liquor stores?

JB: No question, by quite a long way. That store is doing close to half a million dollars per week.

But to be honest, the reality is we didn’t have expectations. There is nothing to compare it to, the black market doesn’t exactly open its books and tell you how they were doing. You don’t know. We were pretty confident it was going to be a good location. We designed it quite differently from our stores in Alberta because of the extremely high transactions we would be processing, and that is what happened. It is designed as a high-processing-transactional store and we knew full well that might only last a year or whatever depending on Ontario and the lottery.

There will eventually, for sure, be competition, and the volumes will inevitably go down because there are lots more places to go. If there is one [cannabis store] on every block you walk to the one on your closest block. Yeah you can price a little different and retail a little different.

How do you determine reasonable investment in the space?

CP: How do you determine what a reasonable investment in the space looks like if you don’t know what type of returns you’re going to get?

JB: You don’t. You just take a risk.

In the grand scheme of our company, [the Queen Street location] was a very tiny risk. It is an investment in getting into that marketplace with a good store in a good location early on and establishing the brand for the time when it is open season for licences and it becomes like any other retailer.

I’m not altogether sure of the logic behind governments protecting future retailers from opening a store because there is no supply.

I can go open a shoe store and nobody makes sure there are lots of shoes for me to buy before they let me open. It is not logical to me but whatever, I’m not in the government and they are going to do what they are going to do.

For us it was worth the investment for us to do that and as it turns out it will pay off extremely handsomely, but it wasn’t all financial. That one was some positioning for the market as well.

CP: What advice would you give to someone who had won the second Ontario lottery: go it alone or partner with a larger player like Alcanna?

CP: What advice would you give to someone who had won the second Ontario lottery: go it alone or partner with a larger player like Alcanna?

JB: I have had many [winners] call me in the past week and I will tell you what I tell them: you just need to go into it with eyes wide open.

There is no guarantee there is not going to be more licences coming in two months or four months and there definitely will be a whole bunch. Ontario’s law still says an unlimited number of licences with any one person capped at 75, but otherwise there will be as many as people want to apply so it will be competitive.

Retail is a very difficult business. Retail is detail. You have to deal with pennies and margins and managing labour and rent can be extremely high and there is nothing you can do about that. And retail is a very competitive business so you can’t just price indiscriminately and consumers are very price conscious, always.

I would just be really careful if some of the players that are out there trying to secure sites, just as we did in the winter at 499 Queen Street West (Nova Toronto) and you have a very attractive proposition from people who know what they are doing and they can teach you how to retail and provide the financial backstop and so on until you get going, you can probably make more sense to do that, frankly.

It depends what people are offering. There are lots of deals floating around out there. For us, it has to make business sense. That one on Queen Street was a bit of an anomaly but anything else, if it doesn’t make business sense for us, we are running a real business here so we wouldn’t do it. We are not going to pay millions of dollars for an exclusive, which is not that exclusive anymore, for something that could be gone in a few months.

Then it really is real life, you’ll look at your lease, your location and it is just retail again. We are unlikely to participate this time around, but having said that you never say never. We weren’t particularly aggressive the last time either but the lottery winner we partnered with just happened to be someone – Mrs. Heather Conlon – where she and her husband own a company that happens to be one of our major suppliers to our liquor business. They are based in Ontario but they make locks and safes for our whole chain. They actually approached us and said they know us and how we do business and they wanted to work with us, I would imagine they turned down better offers.

Lottery strategy

CP: What do you make of that strategy that so many other retailers have been pursuing of essentially dropping big bags with dollar signs on them in front of lottery winners?

JB: Not really my place to comment on what other people do at other companies, but a lot of those entities as I read about them, their only business is trying to start and get a cannabis retail network going.

A lot of them have some capital issues as the capital markets have dried up quite a bit for Canadian cannabis, retail at least, so you need to make some noise in the market. It certainly makes sense to me if I was them, but we are not in that position.

Alcohol vs. cannabis retail

CP: You’re the only example of a cannabis retailer that is also an alcohol retailer. What kind of differences have you noticed between the two businesses?

JB: Liquor is something that has 80-some-per-cent of the adult population drinks at some point in the year whereas with cannabis it is, the numbers are a bit harder to pin down but it is somewhere in the 20s, so you have a much broader base of people in liquor. Liquor people essentially know what they want, they are brand loyal. It is an established industry with some players that are world-class at branding and creating household names. People know what they want.

Cannabis is completely different.

In our Liquor Depot liquor stores, the bulk of our fleet basically, the average person spends three minutes in that store. They come in, they know what they want, they buy it, and they get out and go on their ways. Our Wine and Beyonds, which is our huge format store – 20,000 square feet, 14,000 SKUsour Wine and Beyonds average customer spends 37 minutes the store. They come to shop and to talk experience.

And cannabis, it’s like our two businesses, but it’s all in one.

The experienced customer comes in, buys, and leaves.

Whereas, other people come in, and they want to learn about it. Often times, they don’t buy.

For the liquor store, our conversion rate is 99%. You don’t walk into a liquor store to wonder if you want to buy something and walk out. You know what you’re going to buy, you buy it, and you leave.

CP: What’s the conversion rate for cannabis?

JB: It depends on the neighbourhood, but it would be in the high eighties, maybe.

CP: What differences, in terms of the pure business, have you noticed so far? Is there a difference in the average margins, average basket size, have you noticed differences for that yet?

JB: Yes, for sure. Cannabis, not to generalize too much, the market, until May, was dominated by the fact of whether there was any supply or not. You only sold what you happened to get. which was what the government had available. and we made mistakes, like many retailers did, like when the dried flower literally dried up.

All that was really available, for much of the winter was oils and capsules. So we bought it. The customers didn’t want it at the price point we offered, so we chose to drop the price to the point that would get it off our shelves.

All products – dried flower and different concentrations of THC as well as oils and capsules, and CBD which were almost non-existent for three months, is now readily available so it will change. the more stores that come, there will be margin pressure, probably. So then, it gets back to location. if you’re in the right place, where it’s convenient and easy, and a good environment for people to go, you’ll do a little better than in a location where someone has to come and find you.

New products coming online

CP: Do you think margins are going to fall as low as the liquor business? Or do you think you will still enjoy a bit of a higher margin?

JB: I think no, not for a long time. The margins are quite healthy in cannabis. We expect they will stay there.

Frankly, we expect them to go up significantly because the margins, as we understand it, on the new products – the value-added products, vape pens especially, and edibles, topicals – are a lot higher than dried flower. This other stuff is more CPG (consumer packaged goods) retail. Margins are generally higher in that.

Overall, we are expecting margins to rise once all products that are available are allowed to be sold. We're really looking forward to that in December, and the first half of 2020 when the industry is able to roll out those products and get them on shelves.

We’re also expecting they may be a little slow getting going as they get their facilities going. All products will not be available in huge quantities on December 17, we know that ... that’s fine, that’s normal. By the back half of the year, it will be.

Focus on new products

CP: How much more focus do you intend to place on the value-add products, given how much higher margin they have? Are you going to shift more attention to that, once you can?

JB: Yes, absolutely. A lot of customers are asking about it, they ask when is it coming.

With the qualification that, at the end of the day, one of the sometimes forgotten but relatively obvious points of a retail business: you can’t tell people what to buy. They’re going to buy what they’re going to buy.

But initially, absolutely. Any retailer will try to keep it as much as we can. It’s highly anticipated by consumers.

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