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Part of cannabis and small business and retail

Cannabis growers’ plans to expand into retail in Ontario are in limbo after the province unveiled legislation on Thursday that would limit their share of Canada’s largest market.

The proposed law would restrict marijuana producers and their affiliates to operating just one retail store at one production site. It is unclear whether a grower could take a minority stake in a retailer. It could come down to how the province defines the term “affiliates” in regulations it plans to issue by December.

Out of 118 production licences Health Canada has issued, 63 are for companies in Ontario. Many of their sites are far from cities, where most of the expected customers live.

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The Progressive Conservative government has said it is drawing a line between cannabis producing and retailing in a bid to spur competition and prevent a few large players from gaining control of the market. This could derail some growers' plans to add a retail chain to their business in Ontario.

Grow Technician Rebecca Canplin trims cannabis plants during the grand opening event for the CannTrust Niagara Greenhouse Facility in Fenwick, Ont., June 26, 2018.

Tijana Martin/The Canadian Press

“It’s not surprising, because [Premier] Doug Ford is for the little man. That’s his whole mantra,” said Eric Paul, chief executive of cannabis grower CannTrust in Vaughan, Ont. “It’s a bit of a vote-getting strategy.”

The uncertainty over whether producers could have more than one retail store in Canada’s most-populous province weighed on their stocks on Thursday. Shares of CannTrust Holdings Inc. fell 7 per cent, Aphria Inc. dropped 6 per cent, Canopy Growth Corp. declined 5 per cent and Aurora Cannabis Inc. slid 4 per cent. (Stock in Tilray Inc., which is listed in New York rather than in Toronto, as with the others, was up 15 per cent.)

There could be between 500 to 1,000 legal cannabis stores in Ontario within a short period of time, one government official told media Thursday during a briefing. That’s a lot more than the 150 stores the Liberal government had planned to open by 2020 under the old retail system.

Mr. Paul believes the retail business will be fiercely competitive. That’s why he isn’t too fazed by the one store per grower limit and says Ontario’s new retail model is better for CannTrust.

“I’m happy for my products to be everywhere,” he said. “The more locations out there to make it accessible to the consumer and drive the black market out is the real win for licensed producers.”

The legislation comes with legalization less than three weeks away, and producers are racing to meet their initial orders, place excise-tax stamps on every unit and ship products to warehouses across the country.

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The Ontario government also said on Thursday that it will open the application process for would-be retailers in December, a month before cities can decide whether to allow legal stores within their borders.

“How can you start signing locations and doing agreements if the municipalities haven’t told you yet who’s in and who’s out?" Mr. Paul said. “It’s the ninth hour here and we don’t know anything."

He added that CannTrust will not try to anticipate how it may have a larger presence in Ontario until regulations are released.

However, companies that want to be retailers are forging ahead.

Edward Sonshine, CEO of RioCan Real Estate Investment Trust, one of the country’s largest landlords, said he expects a fierce fight among retailers in Ontario for the best locations for cannabis stores, which could drive up rents.

Edward Sonshine, CEO of RioCan Real Estate Investment Trust

Jim Ross/The Globe and Mail

In Alberta, competition was so fierce that some agreed to 10-year leases at double the market rate even before they had been approved to sell marijuana, industry players have said.

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While some of the toughest competition in Alberta came from large producers, the race in Ontario for prime stores will probably also be tight even without the growers, Mr. Sonshine predicted.

That’s despite uncertainty over how many stores they will be able to operate, or which, if any, municipalities might opt out, he said.

“Knowing what I’ve seen so far, I think there will be a lot of marijuana retail operators, particularly those that have some good backing – they’re going to go out and sign leases and take a chance,” he said. “We saw that happening in Alberta.”

He said some retailers could have to pay to get out of a lease if they fail to get a licence or a municipality bans cannabis stores. “Most of them are prepared to do that,” he said. “They figure the rewards are big enough for the right location.”

James Burns, CEO of Alcanna Inc. of Edmonton, which is the biggest privately held liquor operator in Alberta, is looking for sites for cannabis stores in Ontario. Next week, he will be at the International Council of Shopping Centres annual conference in Toronto to talk to landlords.

Alcanna already has leases or agreements in Alberta for more than 50 locations, although it is allowed to operate only 37 stores – the maximum for a single retailer in that province in the first year.

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He expects heated competition for locations in Ontario. “The better the spot, the more competitive it is.” But without the major licensed producers looking for multiple stores, the rates may not climb quite as high as in Alberta, he says.

Although Alcanna is 25 per cent owned by cannabis producer Aurora, Mr. Burns said he does not expect Ontario’s proposed legislation to affect Alcanna’s operations. In British Columbia, Alcanna is looking for store sites as well but it won’t be able to carry Aurora’s products because of B.C.'s rule that a retailer can’t carry products of a producer that owns more than 20 per cent of the business. And because of the sensitivities about limiting producers’ presence in retail, Alcanna may reconsider its plan to call its cannabis stores Aurora in those two provinces, Mr. Burns said.

Diane Brisebois, president and CEO of the Retail Council of Canada

DEBORAH BAIC/The Globe and Mail

Diane Brisebois, president of the Retail Council of Canada, said her group and others had pushed Ontario to ensure one producer could not be too big a force in both cannabis retailing and production. She said the bill creates “a level playing field.”

But she said other parts of the bill make it unclear how cannabis retailing will evolve, such as possible limits on how many stores one operator can have.

“The devil’s in the details,” she said.

Available now: Cannabis Professional, the authoritative e-mail newsletter tailored specifically for professionals in the rapidly evolving cannabis industry. Subscribe now.

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