As consolidation hits Canadian cannabis retail, more M&As expected

The interior of a High Tide Canna Cabana store in Toronto. (Photo courtesy of High Tide)

Consolidation is picking up among Canada’s regulated cannabis retailers as recreational marijuana sales continue their upward monthly trend, with industry insiders predicting more store mergers and acquisitions.

The retail M&A trend appears to be driven by a market that’s growing more competitive and crowded in certain areas, large chains attempting to cement their competitive advantage and expand their brand portfolios as well as retailers seeking quick expansion in existing markets.

Recent multistore purchases include High Tide’s acquisition of Meta Growth Corp., Fire & Flower’s acquisition of Friendly Stranger and Delta 9 Cannabis’ acquisitions of retail stores beyond its home province of Manitoba.

Seeking new market segments

Trevor Fencott, president and CEO of retailer Fire & Flower, said the company’s recently announced acquisition of Ontario store operator Friendly Stranger “was really about becoming a multi-banner operator, to address a bigger market segment.”

Friendly Stranger was a well-known Canadian marijuana accessory retailer long before legalization.

“This is about retail experience and brand affinity. … Friendly Stranger has been around for 25 years,” Fencott said.

“Obviously, in the cannabis industry, that’s a huge swath of time.”

Fencott said another benefit of the deal is Friendly Stranger’s experience in the higher-margin marijuana accessories market, a retail segment with less red tape than cannabis itself.

The acquisition will quickly boost Fire & Flower’s Ontario presence, with Fencott expecting to approach the province’s current 30-license cap in the first quarter of 2021.

“I do think there’s going to be M&A, I’m just not sure all of it is going to be financially responsible – someone’s going to be reactive, I think,” Fencott said.

Regional diversification

Winnipeg, Manitoba-based cannabis producer and retail operator Delta 9 Cannabis has focused its retail acquisitions on western Canada, acquiring two Alberta stores from Modern Leaf Group last summer for $1.3 million Canadian dollars ($993,000) in cash and shares and, more recently, picking up a store in Saskatchewan from Auxly Cannabis Group for CA$875,000 in cash and shares.

Those acquisitions bring Delta 9’s store tally to eight, including five in Manitoba.

Delta 9 CEO John Arbuthnot said he considers the crowded Alberta market, which has roughly 540 store licenses to date, to be “past saturation.”

“In that type of market instance, entering the market and doing a new store build actually becomes quite difficult,” Arbuthnot said.

“Not only because it’s difficult to find a spot on the map that’s not already occupied, but also you’re getting in and you’re fighting this uphill battle against other established retailers, you’re trying to acquire their customers who were already, to a certain extent, sticky or loyal.

“So, in a market like Alberta, it looks like consolidation is probably a better play.”

Arbuthnot said Delta 9’s Alberta and Saskatchewan acquisitions serve as steppingstones to further growth, “where, now that we are a licensed entity and worked through that due diligence process with the regulator, any subsequent transaction in those markets can be done much more quickly.”

Although Arbuthnot expects further consolidation in Canadian cannabis retail, he highlighted the importance of considering whether acquisitions create value.

“And I think too much in the cannabis space, early on, was about getting deals done, and the price didn’t matter, and (the attitude was), ‘Let’s just throw a bunch of assets together and hopefully it’ll make sense,’” he said.

“And obviously, we’ve seen that that didn’t (make sense). So I think people are being a little bit more targeted in terms of what type of deals they’re entering into, whether that’s us or the rest of the space.”

Achieving size and scale

Calgary, Alberta-based High Tide recently completed its acquisition of Meta Growth by way of a share exchange agreement.

“To get ahead of the competition, size and scale is imperative,” High Tide CEO Raj Grover told Marijuana Business Daily.

“And the Meta acquisition gives us exactly that. We practically doubled our footprint to 66 stores with this transaction.”

On top of giving High Tide new access to Manitoba, expanding its Ontario presence and paving the way for cost synergies, Grover said the acquisition will help boost High Tide’s gross margin by giving its cannabis accessories business new stores to supply.

He also said High Tide is pursuing a white-label cannabis opportunity that will benefit from higher store volume.

Grover believes more Canadian marijuana retail consolidation is “almost necessary.”

Outside the largest urban centers, he explained, much of Canada is thinly populated relative to the United States, leaving less room for local competition.

Grover said competition in those smaller markets is especially difficult because Canadian retailers mostly sell the same selection of cannabis products sourced from the same provincial wholesaler, making differentiation more difficult and forcing retailers to compete on price.

“Too many competitors in close proximity to each other potentially results in aggressive price wars, which is a losing battle for everyone, for all retailers,” Grover said.

“Due to the market saturation, competing on price becomes the most important mandate for retailers, but that compromises customer service and overall customer experience as well,” he continued.

“So, retail consolidation, in my mind, helps solve this problem and creates a healthier landscape for the industry to not just survive but thrive.”

Pent-up acquisition interest in Ontario

Canada’s biggest single market, Ontario, has been well behind the curve in licensing sufficient cannabis stores since legalization and only recently increased the pace of licensing to 40 per month.

Matt Maurer, co-chair of the cannabis practice at Toronto law firm Torkin Manes, has worked on multiple retail acquisition deals.

He noticed increased interest in Ontario store acquisitions after a regulatory moratorium on change of control over store licenses expired in December 2019.

Some stores have been sold before they’ve even opened, he said.

“There’s people who never thought they’d have to wait a year to get an inspection and open and just can’t hold it, or don’t want to hold it for a year, so they’re happy to sell their location,” Maurer said.

“There’s, on the other side, buyers that are happy to look at good locations and buy them from people that are not interested in holding them without revenue for a year at a time.”

Ontario currently has 246 cannabis stores authorized to open.

As licensing finally ramps up in the province of 14.7 million people, Maurer believes some store owners’ concerns may drive new acquisitions.

“And that concern is either, ‘Do I need to get out before there’s too many stores?’ or ‘Do I need to scale up, and give myself a bigger foothold and a bigger advantage before there’s more stores than there are now?’”

Solomon Israel can be reached at [email protected]