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HIGHLIGHTS
  1. Insiders say hundreds of thousands have submitted applications into Ontario retail lottery
  2. Several retailers plan to contact lottery winners to offer potential deals
  3. Franchising appears to be the strategy of choice

Dear winners of Friday’s Ontario cannabis retail lottery: Trevor Fencott has a lucrative offer waiting for you.

“If you win, please contact me, we’d be happy to work something out with you,” the CEO of Fire & Flower said jokingly to a room full of investors gathered at the Shangri-La Hotel in downtown Toronto this week for a conference hosted by AltaCorp Capital. The remark, coming from the head of a company with nine retail cannabis stores in Alberta and Saskatchewan and big ambitions for more – including in Ontario – got a decent laugh.

But the rollout of bricks-and-mortar stores in Canada’s largest market is no laughing matter to the country’s largest cannabis retailers, whose plans for Ontario are being thwarted by a supply crunch-induced lottery. Companies that previously expected to have dozens of locations authorized to sell cannabis in Ontario as of April 1 now find themselves among hundreds of thousands of applicants for just 25 licenses being handed out on Friday.

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And with no guarantee of any additional licenses going up for grabs before the end of 2019, or possibly even later depending on supply, those retailers hoping to hit the ground running in Ontario are being forced to think creatively.

“The count [as of Jan 8] was that north of 400,000 applications had gone in, that is the number we had seen from people who were actively tracking it,” said Dave Martyn, president of British Columbia-based cannabis retailer Starbuds “so I think it is long odds to get in… but we gave it our best shot to win.”

His backup plan, if Starbuds has poor luck on Friday, is to call up those who fared the odds better and make them an offer that might be hard to refuse.

“We are going to publicly prepare to offer out some franchising help on what we think might be enviable terms,” Mr. Martyn said. “And we will see if people are interested, because we are going to try and make a play on [Ontario] one way or another.”

While Ontario has imposed restrictions – such as preventing cannabis producers from owning more than 9.9 per cent of a cannabis retailer – aimed at preventing the largest players from dominating the market, many openly question whether such limits can be enforced. “I think the Ontario government’s position on aggregate ownership, it is going to be very, very difficult to police as a matter of fact,” Fire & Flower’s Mr. Fencott told the AltaCorp Conference. “Anything under 10 per cent I think you’re going to find it is difficult as a practical matter, to determine [since] how do you know whether someone is 20 per cent owned by [licensed producers] with each owning 1 per cent? We will have to get through that issue.”

Franchising, as Starbuds is planning to pursue in Ontario, is an option major producers such as Canopy Growth and its Tweed line are considering as a way to circumvent the government’s restrictions. Others, such as Fire & Flower and Alberta-based retailer High Tide, are planning to open stores selling cannabis accessories and apparel to establish a beach head in Ontario until their locations can win licenses.

Whoever does find themselves among the winners of Ontario’s retail cannabis lottery, which Mr. Martyn was told should be revealed before the end of the business day on Friday, can expect to also win immense attention.

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“In Saskatchewan, they were approached by everyone in the country, offering this program and that program,” Mr. Martyn said, referring to the small businesses and individual operators that won approximately half of the 51 cannabis retail licenses issued via lottery in Saskatchewan last summer, “You’re going to see a lot of that in Ontario where people are trying to make side deals to acquire licenses a year from now and all these kinds of things so it is going to be a wild world for those groups that win. They’re almost going to need a press agent or at least somebody handling phone calls because there are going to be some big-money groups getting in contact with them within an hour of that announcement coming down.”

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