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The Ontario government is facing fresh criticism over its cannabis retail rollout after a second lottery to award new store licences led to clusters of winners in small areas and shut out established retailers.

On Wednesday, the Alcohol and Gaming Commission of Ontario (AGCO) announced 42 winners of the right to apply for cannabis retail licences across five regions in the province. Industry experts and existing private cannabis retailers said the results show that the government has failed to address problems that arose after the first lottery in January – and possibly create new problems.

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“We are going to see another feeding frenzy where you have these golden ticket winners out there, essentially auctioning off their ticket to the highest bidder,” said David Phillips, former president of the government-owned Ontario Cannabis Store (OCS) and current general counsel and principal of communications firm Navigator. “That is something we will likely see play out over the next week or so.”

No established retailers were picked in the draw.

After 25 mostly first-time business owners won the first lottery last January, established cannabis retailers paid winners millions of dollars for the right to put their brand names on their stores and, in some cases, to acquire the businesses when regulations allow. The barrier of entry was raised for the second round – applicants had to secure a suitable retail space and $250,000 of working capital in advance, versus just a $60 entry fee for the first draw. Fewer than 5,000 applications were submitted to this time, compared to more than 17,000 in the first round.

Some applicants had already signed deals with existing retailers before the second draw, Mr. Phillips said, but added: “I don’t have any doubt that a significant number of [the] winners are not aligned at this point in time and will actually be out there shopping around.”

Winners must now submit applications, licencing fees of at least $6,000, and a $50,000 letter of credit to the AGCO by Aug. 28. All told, the second lottery had 4,864 submissions from about 1,800 individuals or firms.

While the process was designed to be random, most of the winning addresses were associated with multiple lottery submissions, suggesting applicants worked together to improve their odds. One successful address in Oshawa – which was drawn twice – was on 169 different submissions.

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Thirty of the 42 retail locations drawn were on more than 10 separate applications, lottery data show. Only seven winning addresses were on a single application.

One proposed location in Toronto – 104 Harbord St. – is the address of a well-known illicit cannabis store called CAFE Cannabis. AGCO spokesperson Ray Kahnert said the agency will conduct eligibility assessments as applications are submitted, adding that regulators “may conduct police and background checks on applicants and persons interested in the applicant, as needed.”

The AGCO also posted waiting lists for each region, and Mr. Kahnert confirmed that if the agency finds any of the lottery winners ineligible, their right to apply will go to the first name on that list.

Lack of rules for how close proposed cannabis stores can be to each other also led to a clustering of sites around the most popular retail areas. Five of the 13 winning addresses in Toronto are along the Queen Street West shopping strip, which already has two legal cannabis stores.

In addition, three addresses in Innisfil near Barrie were drawn in the lottery that are all close together on a rural road.

After the Progressive Conservative government abandoned its predecessor’s plan for government-run stores, it had planned to use an open licensing system, under which anyone can apply. However, a supply shortage in late 2018 forced the province to adopt what it called a “phased approach,” which spawned the lottery.

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"Nine months ago, there were legitimate concerns around supply, but those just completely do not exist today,” said Tom Dyck, a former Toronto-Dominion Bank executive who is now chief executive of mihi, an aspiring cannabis retailer that has been holding leases on 30 empty locations since the start of this year. “Frankly, it escapes me how we are still in the business of doing lotteries versus building this industry in a thoughtful way.”

His staff is trying to make contact with lottery winners “who are interested in our approach to retailing,” Mr. Dyck said.

Two lottery winners have already contacted Calgary-based Canna Cabana parent High Tide Inc., CEO Raj Grover said. “And we expect many more to do the same,” he said, noting his company struck agreements with three of the 25 winners in the first lottery – in Toronto, Hamilton and Sudbury.

Edmonton-based Fire & Flower has put its name on two stores owned by first-round lottery winners in Kingston and Ottawa, and CEO Trevor Fencott said he is willing to discuss similar deals with the latest winners.

“While I would much rather be spending capital building stores and employing people and actually combatting the illegal market rather than paying out Ontario lottery winners, the reality is we are in business and that is the system that, unfortunately, we have in Ontario, so of course we will need to have those conversations,” Mr. Fencott said.

Mr. Phillips said he has a “high degree of confidence” Ontario will move to open licensing soon. However, Jenessa Crognali, spokesperson for Ontario Attorney-General Doug Downey, would say only that “the government is working with the AGCO and Ontario Cannabis Store to return to our original plan to allocate retail store licences based on market demand.” She did not provide a timeline.

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The new stores, set to open as soon as October, are in addition to the 25 allocated in the first lottery and the eight recently distributed to First Nations on a first-come-first-serve basis, bringing the total to 75 stores expected to be open by the end of this year.

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