Cannabis Shortages in Canada Represent a Huge Opportunity for Retailers

J. Frank Sigerson  |

Nearly two months after the cannabis legalization in Canada, the demand for the products has already exceeded the supply. In fact, the shortage was immediately felt two days after the law took effect in October 2018.

By November, some provinces have already tweaked regulations related to the issuance of licenses for cannabis stores In Ontario, officials decided that due to cannabis shortages it will instead issue licenses in tranches. In Ontario, it was decided only 25 stores will be granted approval to sell cannabis. The initial draw happened in January 2019 and the majority of licenses were issued to individuals. The big retail companies are now seeking to form partnerships with these individuals to establish a presence in Canada’s largest market.

The cannabis Crown corporation in Alberta has stopped issuing new licenses entirely after it only received 20% of the overall stock it ordered ahead of the legalization.

The Alberta Gaming, Liquor, and Cannabis Commission placed an order that would have covered demands coming from 250 recreational marijuana shops for six months, but most suppliers failed to deliver.

Aurora Cannabis  (ACB), the second-largest marijuana company in the world in terms of market capitalization, was confident it can deliver the orders placed ahead and after legalization came. The company recognized, however, that demand may supersede supply for “some time” after this. Tilray  (TLRY) said it’s now looking into wholesale purchases to arrest the supply gap but there’s just not enough cannabis coming from producers.

Cannabis shortage to end within a year

In December 2018, Prime Minister Justin Trudeau acknowledged that the cannabis market is currently being strangled by the lack of supply. The problem, however, will disappear within a year, he told The Canadian Press during an end-of-year interview. The prime minister was in fact slightly more optimistic, expecting that shortages could actually be resolved in the coming months.

There have been talks that the present situation is making investors cautious of Canadian firms. The correct perspective, however, should be that the fact that there’s a shortage of supply means there exists a massive opportunity waiting to be filled.

While some were quick to give up on the market, others have already positioned themselves strategically ahead of the competition. For them, gains, in the long run, could be legendary.

Retail-focused firms set to profit from adversity

While many firms are now scrambling to secure licenses just when regulators have implemented a limit, there were companies that have acted in advance.

One is Choom Holdings Inc.  (CHOO:CNX), an emerging cannabis company that has always set its eyes on the opportunities abound the cannabis retail market. In fact, Choom may have already secured one of the largest national retail networks in the country and is one of the only outfits capable of serving the entire cannabis sector, medical and recreational.

“The private retail market in Ontario provides the greatest opportunity across Canada for cannabis retailers. This channel in Ontario is poised to be larger than all the other private cannabis retail channels in Canada combined,” Chris Bogart, Choom president and CEO, said, announcing two additional executives that will oversee operations in the province.

The company has 90 offers to lease in Ontario. Of these, 20 are already secured, bringing Choom’s total to 78 retail opportunities across Canada. Out of 50 applications submitted, 35 development permits were received from various municipalities. Ten stores are now being constructed while seven stores more are near their completion.

There are other emerging firms which have chosen to pursue opportunities in the retail space, but few have managed to catch the eye of industry heavy hitters in the way that Choom has. The growing company has secured the support of Aurora Cannabis, and, in November 2018, Aurora completed a second financing in Choom bringing its total investment up to CAD 27 million in the retailer.

While Choom is more initially inclined toward providing recreational marijuana to adult users, it has started looking into opportunities in the medical use of cannabis.

In November, it acquired Clarity Cannabis Medical Center, along with its proprietary telemedicine platform which simplifies the purchase of legal medical marijuana for new patients with several health issues that may include chronic pain, seizures, and general anxiety.

"Our goal is to build a dominant national cannabis retail brand. The acquisition of Clarity Medical Centres allows Choom to service the entire Canadian cannabis market, beyond just the adult use channel,” Bogart said at the time of acquisition.

A huge opportunity for retailers

One of the reasons why the Trudeau government pushed for the legalization of marijuana is to eradicate the black market that has been abusing the industry for so many years.

During the prime minister’s end-of-year interview with The Canadian Press, he said he was saddened with Quebec’s legislation that sets the legal age for cannabis consumption to 21 from 18. Trudeau said this will make it harder for authorities to stop organized crime as those younger than 21 might just end up accessing supplies from them.

There’s nothing that can be done about this age-related legislation for now. However, having more licensed retailers across the country shall make competition for the larger adult market harder for the organized syndicates to penetrate.

According to Statistics Canada, 4.9 million Canadians were already consuming cannabis in 2017. This translated to about $5.7 billion spending. Of that, 90% went to the illegal cannabis market.

As authorities continue to stop illegal marijuana operations, the supply void becomes bigger and retailers are the most ideal platform to capture it as they could practically mushroom across the country. Unlike cannabis farms or factories, retailers will be the most accessible platform where buyers could simply come and go for their supply.

While pessimists are focusing on the current but temporary issues surrounding cannabis shortages, those who are smarter set their eyes to the long-term and permanent potential of the market, which according to the Canadian Imperial Bank of Commerce could grow into CAD 6.8 billion by 2020.

DISCLOSURE: I have no financial interests or connection with any of the companies mentioned in this article.


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CHOO:CNX Choom Holdings Inc - Ordinary Shares 0.70 0.00 0.00 915,502
TLRY Tilray Inc. 67.16 -3.09 -4.40 1,610,588 Trade
ACB Aurora Cannabis Inc. 9.03 -0.54 -5.64 52,440,595 Trade

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