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Ontario’s recent decision to increase the allowable number of retail stores for cannabis companies has garnered mixed reactions within the industry. This significant policy shift has seen the government of Ontario effectively double the store limit for licensed cannabis operators, elevating it from the previous maximum of 75 stores to a new cap of 150 stores. This development has been received positively by several industry stakeholders, who consider it a forward-looking measure aimed at broadening the retail presence of the cannabis market.
However, Gennaro Santoro, serving as the senior director of strategy at EY-Parthenon and a key figure in the EY Americas Cannabis Centre of Excellence, has offered a more nuanced perspective on this development. In his insights shared with BNNBloomberg.ca, Santoro emphasized that the reality of the Ontario cannabis market, characterized by its saturation, might limit the effectiveness of this policy change. He pointed out that a majority of operators within this crowded market had not even reached the previous threshold of 75 stores, indicating that the new, higher cap of 150 stores might only benefit a handful of operators.
Santoro’s analysis suggests that this change in regulation may have a significant impact on a very small segment of the market, specifically those retailers who have the capacity and resources to operate close to or beyond the initial 75-store limit. For these select few, the increased cap presents an opportunity for expansion and growth. However, for the broader market, this regulatory adjustment could potentially exacerbate the existing conditions of competition, introducing further challenges in a market that is already densely populated with retailers. Santoro’s insights thus paint a picture of a policy change that, while seemingly beneficial on the surface, may have a limited and selective impact on the overall landscape of the cannabis retail market in Ontario.
Response from the Industry of Ontario
One notable company has expressed positive sentiments regarding the new regulations introduced in Ontario.
Raj Grover, the founder and chief executive officer of the renowned cannabis company High Tide, has openly praised the recent policy change, emphasizing its potential to create a more equitable landscape for retailers in Ontario’s cannabis market. Grover believes that this shift in regulations could play a pivotal role in enabling companies to effectively compete with the illicit market, which has been a longstanding challenge in the industry.
Furthermore, Grover highlighted the direct benefits that these regulatory changes could have on the growth and expansion of High Tide. He expressed confidence that the opportunity to open an additional 100 locations under the new policy would significantly enhance the company’s revenue streams and propel its growth trajectory in the ensuing years. This expansion is not just a strategic move for High Tide but is seen as a crucial step in reinforcing its status as the leading non-franchised cannabis retailer in Canada.
In a written statement reacting to the Ontario government’s decision, Grover articulated his company’s ambitious plans, which have been invigorated by these regulatory adjustments. High Tide is now setting its sights higher, adjusting its long-term growth objectives to exceed 300 brick-and-mortar stores across Canada. This revised target is a direct response to the newfound possibilities opened up by the Ontario policy change. Grover’s remarks reflect a sense of optimism and strategic foresight, underlining the company’s intent to leverage these regulatory modifications to expand its footprint and influence in the Canadian cannabis market significantly.
Low Asset Utilization
The cannabis retail sector in Ontario has been facing significant challenges in achieving profitability, a situation highlighted by Gennaro Santoro, a leading industry expert. Many cannabis retailers in the province have found themselves grappling with financial difficulties, leading them to adopt cost-cutting measures to strengthen their financial standing in the year 2023.
Santoro observed that within the wider cannabis industry, there is a growing trend towards reducing operational costs. He noted that numerous companies are increasingly adopting an “asset light” approach, a strategic model focused on minimizing expenses and avoiding overproduction. This shift towards a leaner operational model is driven by the need to concentrate on the most profitable areas of the business. By streamlining their operations and reducing unnecessary expenditures, these companies aim to improve their financial health and operational efficiency.
Furthermore, Santoro pointed out that firms that successfully implement this asset-light strategy could position themselves advantageously in the market. These companies may find opportunities to increase their market share by acquiring assets from other businesses that are facing financial distress, such as those entering receivership or seeking credit protection. This could potentially offer a strategic advantage in a competitive market.
In addition to cost-cutting measures, Santoro emphasized the importance of differentiation for companies striving to succeed in the current market environment. He advised that companies should identify and focus on specific areas that set them apart from competitors, both in the legal cannabis market and against black market operations.
An example of a cannabis company navigating these challenging market conditions is Tilray Brands, a prominent Canadian cannabis firm that has recently diversified into beer acquisitions. The company reported its quarterly earnings on Tuesday, disclosing a net loss of US$46.2 million, even as its revenue saw a significant increase of 34 percent on an annual basis. This scenario underscores the complex financial landscape that cannabis companies are navigating, balancing growth opportunities with the need to manage financial challenges effectively.
