New data from Ontario’s cannabis retail regulator show nearly 1,500 cannabis stores operating in Canada’s biggest adult-use marijuana market and hundreds more applications in the pipeline, reinforcing concerns that a glut of retailers could force many operators to shut their doors this year.
Ontario had 1,468 licensed cannabis stores open for business as of May 2, with another 445 active store authorization applications under review, according to data provided by the Alcohol and Gaming Commission of Ontario (AGCO).
If all of those applications succeed, Canada’s largest provincial cannabis market could have as many as 1,913 cannabis stores.
However, not all of the pending store authorizations will actually go through, predicted Krista Raymer, co-founder of Ontario-based cannabis retail and brand consulting firm Vetrina Group.
The number of new store openings may not “increase in the same way that we had seen month-over-month store openings (increase) in the past,” Raymer said.
Meanwhile, dozens of Ontario stores are listed for sale, with some apparently languishing on the market for months, lending credence to warnings that the cannabis retail sector in parts of Canada could be due for a reckoning.
Sundial Growers CEO Zachary George recently warned shareholders that “we are starting to observe a trickle of closures on a weekly basis.”
“I expect to see massive store closures in Canada, with the toll likely closer to 1,000 than 100,” George wrote in a letter to shareholders.
32 stores closed since June
Thirty-two cannabis retailers in Ontario have closed and had their store authorizations canceled since June 2021, according to the AGCO, suggesting that some retailers are bailing out of the business.
Store authorization cancellations have occurred in Greater Toronto, as well as Hamilton, Windsor, St. Thomas and Ottawa, the regulator said.
No requests to cancel those authorizations occurred in 2020 or “the first part of 2021,” wrote an AGCO spokesman.
Cannabis retail consultant Raymer anticipates some closures in certain Ontario cities, citing “too many stores for population density.”
However, stores may close for other reasons, she suggested.
Cannabis “is a regulated space with a lot of unanticipated requirements to running a retail store,” Raymer explained.
“And there were a lot of people who got involved in the industry early, not fully expecting what it looks like to run a retail store,” she continued.
“So part of this would be a density problem, and part of it would be people making a choice that the business isn’t what they expected, or not what they were looking for.”
Ontario stores for sale
Commercial real estate listings and classified advertisements show at least four dozen cannabis retail businesses for sale in Ontario, particularly in Toronto.
Not all of those stores are authorized to open.
One operational downtown retailer, listed for 149,000 Canadian dollars ($116,000), has been on the market for more than a month.
What appears to be an unopened Toronto store, listed for CA$99,000, has been up for sale for nearly 80 days.
Many Toronto cannabis retail businesses are listed for considerably more, like two CA$599,000 stores on trendy Queen Street West.
In Hamilton, southwest of Toronto, a licensed cannabis store with a list price of CA$49,900 has spent nearly 50 days on the market.
“The value of a cannabis store has decreased significantly from the first year,” said Raymer.
Prices tend to be four to five times earnings before interest, taxes, depreciation, and amortization (EBITDA), she added, although businesses with certain intellectual property or large customer bases may be worth more.
Some cannabis store operators are looking to get out of their leases, according to Raymer.
“That is something that we’ll probably see in the next six months, is an effort to get those stores sold to be able to offload their responsibility from commitments around leases.”
Warnings of retail slowdown
Ontario cannabis store operators predicted a retail shakeout to MJBizDaily last year, and more warnings have been issued since.
A recent report from the provincial Ontario Cannabis Store wholesaler observed that the pace of new cannabis store openings in Ontario slowed at the end of 2021.
Ontario’s cannabis retail store count only surpassed that of less populous Alberta in April 2021, following a sluggish start that saw only 100 store authorizations issued by June 2020, more than a year-and-a-half after adult-use legalization in October 2018.
The province surpassed 1,000 licensed cannabis stores in August 2021, after the government increased the pace of licensing.
Later that year, BMO Capital Markets cannabis analyst Tamy Chen wrote that “we are increasingly worried about the looming possibility of retail closures in (Ontario)” in light of the saturation of cannabis stores in pockets of the province.
“Such a scenario presents downside to all of our (licensed cannabis producer) estimates,” wrote Chen in the November 2021 research note.
Canadian cannabis store counts are closely correlated with consumer spending on legal, government-regulated marijuana.
Ontarians spent CA$142.6 million on cannabis in February, or 42.4% of total national spending on adult-use cannabis that month.
The province has an estimated population of 14,951,825 as of the first quarter of 2022, or 38.8% of Canada’s total population.