New limits on pot retailers fail to kill buzz for Ottawa cannabis producers

A closeup shot shows dried cannabis spilling out of a jar onto a tabletop

Despite new restrictions on Ontario pot producers’ retail opportunities, Ottawa-area cannabis firms are forging ahead with their sales strategies – including announcing the first possible dispensary location in the capital.

The provincial government on Wednesday shed more light on its framework for Ontario's private cannabis retail marketplace, and introduced related legislation on Thursday.

Ontario officials say they won't put a limit on the overall number of pot shops once recreational cannabis is legal across the country on Oct. 17, but indicated that licensed producers could have only one retail location at a production facility.

Under the new bill, a government agency called the Ontario Cannabis Retail Corp. will handle online cannabis sales and wholesale distribution to private retailers, which are expected to be in place by April.

While there will not be a cap on private pot shops – as there is in some other provinces – Ontario officials have reserved the right to set "concentration limits" on stores in certain areas.

The province's private-retail framework is positive for smaller retailers who won't get squeezed out by massive growers, said Trina Fraser, an Ottawa-based lawyer who advises the cannabis industry.

However, the Progressive Conservative government's plan to limit licensed marijuana producers to one retail location at a production facility deals a blow to licensed producers, and it is unclear to what degree they can be involved in front-line sales.

"What we don't yet know is what degree of affiliation will be permitted between licensed producers and retailers," said Fraser.

Canopy Growth unphased

Bruce Linton, co-CEO of Smiths Falls-based Canopy Growth (TSX:WEED)(NYSE:CGC), said an unlimited number of cannabis shops, whether or not they have its company branding, is still a plus because it represents a larger retail footprint than under the previous provincial government's framework.

The previous Liberal government had planned to roll out 150 standalone government-run pot stores by the end of 2020, with the first 40 scheduled to open this year.

Canopy is one of 32 licensed producers that the Ontario government has signed supply agreements with to date.

"Those stores mean more retail points for our product ... whether or not we get stores," Linton said.

Shares of Canopy were down roughly five per cent in trading on the Toronto Stock Exchange Thursday.

Ottawa’s first dispensary location?

Even for those retailers that meet the licence requirements, where they will be permitted to set up provincial pot shops remains hazy.

Ontario municipalities have until Jan. 22, 2019 to opt out of hosting cannabis stores under the new legislation. The province would also have the ability to set a distance buffer between pot shops and schools.

One of Ottawa’s emerging pot players is Indiva (TSX-V:NDVA), a licensed producer with cannabis-growing operations in London, Ont. The firm announced earlier this week that it had secured a lease for a dispensary location in Ottawa and has 10 others in the works in London and Toronto. Its first lease will see it take over the former Yard Forward and Sew On storefront at Bank Street and Pretoria Avenue, and the company is looking at two more potential leases in the downtown core and Ottawa’s west end.

‘Frenzied’ real estate activity

While Ontario’s limit on pot firms having a single production-facility retail outlet potentially puts a wrench in Indiva’s plans to open a dispensary in the Glebe, co-founder and chief operating officer Koby Smutylo tells OBJ the firm is carrying on with its real estate plans.

If the Ottawa location can’t become a licensed dispensary, it’ll become an administrative office or an information centre. Indiva may end up partnering with a pure-play retail company or forming a subsidiary to fill the spaces; what the company’s retail presence looks like is up in the air until the industry gets more clarity on what’s permissible from the province.

Smutylo says the company has done significant research on dispensary locations, including distances from schools and hospitals.

“Whether we're allowed to open them or whether we have to partner with somebody to open a location, we see those locations as being viable,” he says. He adds that putting a pot outlet on the edge of the Glebe, a neighbourhood with a family-friendly reputation, is ideal for building a positive retail brand.

There has been a "frenzy" of interest in Ontario retail real estate from those looking to set up pot shops, said Deepak Anand, vice-president of business development and government relations for advisory firm Cannabis Compliance Inc.

Many firms have been looking to lock up prime locations and signing offers-to-lease, contingent on getting the appropriate approvals, he said.

"People are paying some hefty premiums playing that waiting game, and landlords are certainly taking advantage of that," Anand said.

Smutylo, a business lawyer who got his start in cannabis by helping Gatineau’s HEXO secure its early financing, doesn’t believe the one-retail-outlet framework will last. From observing the developing cannabis landscape in the United States, he believes licensed producers will inevitably play a strong role in shaping retail across Canada.

“We see dispensaries in Ottawa being something that that will happen, and it's our home, our backyard, and we'd like to be part of that.”

– With reporting from Craig Lord