Ontario’s retail framework for recreational marijuana is a negative for LPs: GMP

We may not be seeing its final form, but as it stands the Ontario government’s framework for regulating and distributing recreational cannabis looks to be very restrictive for current Licensed Producers, says GMP Securities analyst Martin Landry.

Last Friday, the Ontario government announced that legislation would be introduced this fall that would be informaed by its experience in tobacco and alcohol. The province said key elements include an age minimum of 19, that it would sell marijuana though stand alone stores, 150 of which it expects to be open by 2020, and that “illicit” cannabis dispensers would not be considered legal retailers and would be shut down.

“We’ve heard people across Ontario are anxious about the federal legalization of cannabis,” said Ontario Attorney General Yasir Naqvi. “The province is moving forward with a safe and sensible approach to legalization that will ensure we can keep our communities and roads safe, promote public health and harm reduction, and protect Ontario’s young people.”

Stanley says it is important to remember that this is a proposed framework and the details may change. But taken as it is, the analyst says the news is not great for Licened Producers.

“The retail monopoly combined with limited in-store shopper experience appears negative for licensed producers,” Stanley says. ” The LCBO-controlled cannabis distribution creates a monopoly, which is expected to shift the bargaining power away from licensed producers. It also removes the ability for licensed producers to vertically integrate by opening storefronts. Branded stores would have been an effective marketing tool for licensed producers.

Landry says this development is something of a surprise as he had expected that licensed producers would have been able to sell directly online to recreational consumers.

“While most expected that Ontario’s brick-and-mortar distribution would follow an LCBO-type structure, there was some hope amongst industry participants that some form of private distribution might be permitted,” the analyst says. “A scenario where licences would have been given to third parties to operate retail point of sale may have equalized market forces. The proposed LCBO monopoly will shift the bargaining power away from LPs into the hands of the LCBO. The Ontario market, with more than 13m residents, is Canada’s largest market and where most LPs will want to have a competitive offering. However, with the LCBO dictating negotiation terms, profitability metrics may be negatively impacted.”