‘We are in transformation mode’: George Soleas's vision for LCBO's marijuana move

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From the archives: This article was originally published December 21, 2017

In June of 1927, Canada's most populous province left Prohibition behind and legalized alcoholic beverages – with a catch. Sales fell under the auspices of a government monopoly, the Liquor Control Board of Ontario, meant to keep tabs on a risky substance and quell fears of an epidemic of intemperance.

Ninety years later, the LCBO is once again taking the reins on the legalization of a substance that will be under tight control, keeping it out of sight in stores just as liquor used to be, and attempting to assure the public that its track record makes it the ideal candidate to potentially become one of the world's biggest buyers of cannabis, if its liquor purchases are any precedent.

As the 2018 date for legalization looms, the man in charge of that effort is preparing for a year in which his organization will be responsible for unveiling 40 cannabis stores by Canada Day, designing a new retail model for the substance, from scratch. Less than two years into the job as LCBO president and chief executive officer, George Soleas has also been charged with transforming the organization – coping with changing consumer habits to keep his liquor stores up-to-date while also overseeing the end of a prohibition on recreational cannabis.

"It's going to be very cautious," Mr. Soleas said of the roll-out during an interview with The Globe and Mail. "This is a product that, not everybody looks at it through the same lens."

But that does not mean Ontario residents should expect a return to the bad old days of liquor purchasing, he emphasized. For decades in Ontario, shopping at the LCBO was a bleak affair. Forget advice on wine pairings or gift displays for the holidays; there weren't even shelves to browse and no visible product. Shoppers had to hold a permit and could order from a list of products by asking an employee at the counter to fetch it from behind closed doors.

The new cannabis stores will also have no products displayed on shelves, but Mr. Soleas says the environment will not be so cold and uninviting as the liquor stores of old. The designs – still in development by the LCBO's in-house design team – are inspired by the Apple Store, he said, in the sense that they will be clean, bright and uncluttered.

"It will be a pleasant experience," he said. "We're still working on the design, but I'm excited with what I'm seeing."

The new stores will be a tricky balancing act: To provide an alternative to the illicit market, they need to be appealing, a welcoming and pleasant shopping experience; but to comply with legal provisions against marketing or promoting what they are selling or making the product visible to anyone under 19, they also must have a low-profile exterior and security blocking the doors, performing ID checks. There will be no Food and Drink magazine equivalent for cannabis (although the magazine could play a role in the LCBO's goal to educate people about the product) and no rewards program.

There will be iPads on hand where shoppers can search for various products and read more information. Product consultants will answer questions and provide samples for smelling – although no sampling is allowed. The product will be secured out of sight, though, brought out only upon request for purchase. The stores will be roughly 2,500 square feet on average, much smaller than typical LCBO stores, which mostly range from 5,000 to 10,000 square feet. They have not yet chosen a colour scheme. The store designs will evolve after they open in July and the organization has committed to opening 150 standalone stores by 2020.

There is much work still to be done: The search for a CEO to lead the new subsidiary, a Crown corporation called the Ontario Cannabis Retail Corp. (OCRC), is still in progress. For now, Mr. Soleas is in charge of the steering committee overseeing the launch. Eventually, the OCRC will have its own board and management team. The organization has not yet decided if the stores will carry OCRC branding, or another brand name. (The LCBO would not say which branding agency it is working with on the project.) It has to build an e-commerce service for cannabis and has yet to announce its shipping partner. (Canada Post handles the LCBO's e-commerce deliveries and has also delivered medical cannabis since 2013.) Pricing will be set by the government.

Currently, legal marijuana is only available with a prescription from a doctor and comes from around 80 producers licensed and inspected by Health Canada, or home-grown by an individual with a licence, but scores of illegal dispensaries have sprouted up across the country.

"The product will be safe, which is important. Good quality," he said. "A lot of the stuff that people buy in these dispensaries, it's like playing Russian roulette."

Mr. Soleas has been meeting with scientists from the Centre for Addiction and Mental Health (CAMH) and the mental-health clinic at McMaster University in Hamilton and has also been meeting with cannabis producers – the retailer will be responsible for choosing its suppliers, although he is not yet sure whether this will be conducted through a request for proposal or some other process. "We're trying to ensure that the legal producers have enough. … It's difficult to forecast sales."

The breakneck pace for store openings is nothing new: In its first six months of operation in 1927, the LCBO opened 86 stores. This year, the LCBO renovated five stores and opened 12 new locations. In the coming seven months, it will need to prepare more than three times as many for opening.

"Are the timelines tight? Of course they are," he said. "But we've done this before. … The LCBO has a lot of expertise in rolling out stores."

Along with the demands of this launch, Mr. Soleas has also been overseeing what he hopes will be a major shift in how the LCBO relates to its customers, using data to better analyze what they want and to try to improve their relationship with the retailer. Mr. Soleas recently created a new role, head of strategy and innovation and enterprise analytics, to use more of the LCBO's data to try to study what consumers are looking for.

"We are in transformation mode," he said.

Part of that transformation is by necessity: The 450 licences that the government intends to grant to grocery stores to sell beer and wine, first announced in 2015, has created a new "urgency" at the LCBO, and no wonder. It's the first time in nine decades that the organization has dealt with significant competition. So far, more than 200 grocery locations have been given permission to sell beer and cider and roughly 70 of those also sell wine. More are to come.

Mr. Soleas says the LCBO is "not worried" about the competition, since prices are fixed and it makes money in the deal as the wholesale provider to the grocery stores.

But it still has an interest in convincing customers to buy directly from the LCBO: Grocers do not remit as much to the government as an equivalent purchase at the LCBO, since they charge the same prices but collect a commission on each sale – those commissions vary depending on the licence that each grocer has negotiated, but they range from 2 per cent to 9 per cent.

Mr. Soleas is a natural marketer who will find any opening in a conversation to smile warmly and tell you about the "beautiful gift options" available at his stores for the holidays. A Scotch lover himself, he makes sure to note that an LCBO gift card is on his wish list and will suggest to you, unsolicited, that a tasting of tawny ports would be a lovely idea for your New Year's Eve party.

But the LCBO is attempting to compete on more than just marketing.

It is looking into how to modernize its stores, including through a program in Waterloo, Ont., called LCBO Next. One idea from that program currently being tested is a wayfinding app that would let customers search for a product while in store and be guided to where it sits on the shelf.

One thing is certain: The LCBO won't be competing on price. By virtue of its near-monopoly over a market as large as Ontario, for which it buys products in 84 countries, it is one of the world's biggest purchasers of alcohol. That kind of scale usually affords significant negotiating power, but in a decision that may be puzzling to consumers paying relatively high prices for wine and liquor, the LCBO does not negotiate. Instead, it buys from suppliers at the asking price and charges consumers a fixed markup. Mr. Soleas says this is designed to be "transparent with everybody," although it's not clear how negotiating lower wholesale prices and charging the same fixed markup would be any less transparent. One advantage the LCBO gains from its scale is better allocation – the ability to demand selection on products when demand outstrips supply, for example – and more efficient operations.

Mr. Soleas also has to focus on sales beyond its 667 stores: Since it was launched in July of 2016, its e-commerce site has done $13-million in sales on more than 62,000 orders and it's growing. The first four months of sales reached $2.3-million, while the same quarter this year rose to $4.5-million. A year and a half into the program, it's still a tiny fraction of the LCBO's business. Its profit in the last fiscal year ended March 31 was $2.07-billion, on total revenue of $5.89-billion.

"The customer is going to see more of the digital experience," he said.

The LCBO has just created a separate department for e-commerce and is in the process of recruiting a director to lead it. It is working on adding another 1,500 products to the website, which already lists 5,678 items; forty per cent of those are available exclusively online.

But it is still a work-in progress: $12 is not a great deal for shipping unless a customer spends a fair amount – and may be particularly unattractive to a generation of shoppers who have become used to online retailers that offer free shipping as long as a customer spends above a reasonable threshold. Such a model is something "we're looking at right now," Mr. Soleas said. That could spur more use of the delivery service: Fifty-nine per cent of online customers are still electing to pick up orders in stores, while just 41 per cent choose home delivery.

Maintaining and improving a relationship with consumers as their habits continue to shift significantly is a major challenge in the year ahead.

"The LCBO is a great brand," he said. "The idea is to make it appealing, attractive to men and women, millennials and anyone else. We're getting there."