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Canadian legal cannabis sales could increase by 35 per cent next year if Ontario switches to an open licence application system, according to Bank of Montreal analyst Tamy Chen.

Ms. Chen’s model, published in a research note on Tuesday, assumes 325 stores will be open in Ontario by the end of 2020, starting with 10 new stores in January and building towards a rate of 40 new stores opening each month by the end of the year.

If this occurs, Ms. Chen estimates that annual sales in Canada could increase from the current run rate of 155,000 kilograms a year to 210,000 kilograms a year. That projected increase only takes changes in Ontario’s retail environment into account.

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Ontario’s provincial government has indicated that it intends to move to an open allocation model for retail licences, similar to Alberta, but has yet to set any firm dates for the shift. This comes as many cannabis producers have pointed to the lack of stores in Ontario as a key factor in their poor financial performance in recent quarters.

“Ontario represents 40 per cent of the country’s population, yet has one retail cannabis store per 600,000 people. When one year into the market, the addressable market is nearly half of what is expected, there’s going to be meaningful short-term problems," said Canopy CEO Mark Zekulin on the company’s recent earnings call.

Canopy is counting on a rapid increase in the number of retail stores in Ontario in 2020 to absorb $288-million worth of inventory the company has on hand. Ontario needs to open 40 new stores every month starting in January, just for Canopy’s supply of dried cannabis flower to match consumer demand by the middle of 2020.

BMO’s model for the pace of store openings may be “aggressive,” Ms. Chen acknowledged.

“Some of the initial 25 Ontario retail licenses took up to two months to open, and the 68 licenses issued in the second lottery of August have yet to convert into store openings,” she wrote. “In our illustrative scenario, we are assuming the turnaround time between license issuance and store opening declines meaningfully in an open license framework.”

The model uses a sales volume somewhere between 480 kilograms per year (BMO’s estimate for Ontario’s current per store average) and 150 kilograms per year (BMO’s estimate for Alberta’s per store average).

“We expect sales volumes per store will normalize in Ontario as more stores open, but given the larger population versus Alberta, it is likely that normalized unit economics will still be higher than the levels observed in Alberta,” Ms. Chen wrote.

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The model also does not take into account Cannabis 2.0 products, as it “is unclear how much Rec 2.0 sales could generate in 2020 given the currently limited visibility on industry supply chain readiness and demand for certain product categories,” she wrote.

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