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Green rush: The race to sell cannabis in Canada

Green rush: The race to sell cannabis in Canada

Part of cannabis laws and regulations

In Spruce Grove, Alta., people camped out by city hall, waiting for the doors to open so they could apply to open a cannabis store.

In other places in the province, retailers are signing leases with rents that are as much as twice the usual rate, in the hope they will eventually win the right to sell marijuana in those locations.

In Ontario, veteran retailer Michael Serruya says he has identified 27 future locations for cannabis shops – even though the province’s new government hasn’t officially said whether it will allow a single privately owned store to sell recreational marijuana.

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It’s the next wave of the green rush: As legalization nears in October, the spotlight is shifting from marijuana growers to sellers. That has ignited frenetic activity among prospective store owners, commercial real estate players, cannabis producers and the federal, provincial and municipal governments that have designed a thicket of rules about how and when the drug can be sold to consumers.

Left to right: Aaron Nathaniel Serruya, Samuel Serruya, Sammy Serruya, Michael Serruya, Simon Serruya and Aaron Serruya, pose for a picture at their offices in Markham, Ont., on Aug. 10, 2018.

Mark Blinch

It is taking entrepreneurs like Mr. Serruya to places like West Hollywood, Calif., where he recently went for a lesson in how to sell cannabis.

In a store on Santa Monica Boulevard, Mr. Serruya found what he was looking for. Surrounded by slick wood furnishings, security guards watch over crowds of consumers hovering over display tables as they inspect and sniff encased samples. It’s a sleek retail operation that has the high-end feel of an Apple store – only instead of the latest tech gadgets, people line up here to buy a US$20 brownie or an eighth of an ounce of dried flower for US$60.

The location is one of 14 dispensaries run by U.S.-based MedMen Enterprises Inc., a company that went public in Canada in May and has plans to expand here. It’s a far cry from some of the “disgusting, horrible,” spray-painted “pot head” stores that Mr. Serruya says he saw on a recent trip to California and other pot-friendly U.S. states in search of a model for his own nascent marijuana-retailing business.

An investor best known as a co-founder of the Yogen Fruz Canada Inc. frozen-yogurt chain, Mr. Serruya sees a big opportunity in selling marijuana. Now he, along with two brothers, two sons and a nephew, is aiming to launch a chain of cannabis dispensaries.

“Everyone is trying to figure it out,” says Mr. Serruya, whose family private-equity firm has stakes in other cannabis-related businesses as well. For one, he sits on the Second Cup Ltd. board of directors and is leading a push to breathe new life into the challenged coffee chain by converting some of its cafes into standalone cannabis dispensaries in Canada.

“For the next little while, it’s going to be a bit of a Wild West,” he says. “But mark my words, the amount of money that’s going to be made over the next couple of years for the people that figure this out and position themselves properly – this is going to be a huge business.”

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Fire and Flower concept cannabis store in Edmonton.

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Mr. Serruya is far from alone among would-be cannabis retailers in a frenzied sprint to nab a piece of the action as Ottawa prepares to legalize recreational marijuana on Oct. 17. But Mr. Serruya and his potential competitors are in a race with uncertain rules while facing rising costs to secure store locations.

A mixed bag of players is aiming to cash in: provincial governments, growers, new companies hoping to open anything from one store to a big chain, Indigenous groups, U.S. dispensaries such as MedMen and existing domestic retailers ranging from grocery giant Loblaw Cos. Ltd. (which also owns Shoppers Drug Mart and a stake in landlord Choice Properties REIT), to Second Cup and Edmonton-based liquor store outfit Alcanna Inc. (formerly called Liquor Stores NA).

For landlords, the advent of a new segment of brick-and-mortar retailers is a welcome addition to shopping centres that are searching for new ways bring shoppers to the mall in a digital age.

“There’s going to be a gold rush – there’s going to be winners and there’s going to be losers,” said Edward Sonshine, chief executive of RioCan Real Estate Income Trust, one of the country’s largest mall landlords. RioCan has already signed 18 cannabis-dispensary leases in Alberta, Ontario and British Columbia.

“On the retail side, the winners will be the ones, like all retail, with the best locations.”

The Serruyas have yet to receive government approvals to open a single shop. In Ontario, for example, they don’t even know if they’ll be in the game – although they plan to apply for dispensary licences at 27 of their properties.

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Like many, they’re basing their plans on what they think Ontario regulations will look like after a report last month in The Globe and Mail that the newly elected Progressive Conservative government will turn to the private sector for brick-and-mortar cannabis retailing, scrapping a model of government-controlled sales. The Serruyas and others presume the Ontario rules will be similar to those in Alberta, which is looking to dole out about 250 licences to private retailers in Year One.

For months, potential players from coast to coast have been grappling with a web of often confusing and sometimes shifting regulations from the federal, provincial and municipal governments. Rules include specified distances from schools, churches, playgrounds, daycare centres and other cannabis dispensaries, which narrow the options. Municipalities are weighing in with zoning constraints – or outright bans in some cases.

There’s a lot at stake. The cannabis industry could reach almost $7.2-billion by next year, more than half of that from the legal recreational market, according to a recent Deloitte study.

But the regulatory regime is “a work in progress,” said Jennifer Lee, partner at Deloitte and national cannabis sector leader. “It is a complete maze,” she said. “Even the regulations that have been laid out can change. Look at how fast Ontario changed. … Every couple of weeks something changes. If you can’t be agile, you actually won’t survive.”

BUILDING A POT STORE

For years, legal cannabis producers have garnered attention as the most direct opportunity for investors to get a piece of the nascent sector. Under Canada’s medical cannabis regime, producers operate mail-order businesses – the only permitted retail method.

In October, another method will emerge.

In Alberta, competition for space has been fierce among would-be cannabis retailers looking to nab real estate before all the prominent units are gone, with some agreeing to 10-year leases at double the market rate even before they have been approved to sell a gram.

“It’s unprecedented – there’s never been anything like this in commercial real estate in Alberta where we’ve had one category just fresh onto the scene seeking locations,” said Michael Kehoe at retail-real-estate specialist Fairfield Commercial in Calgary. “It was like a green rush of demand for retail space in the past year or so.”

Since January, Alcanna, the country’s largest privately owned liquor retailer, has acquired leases in Alberta for as many as 50 to 60 locations where it could open a cannabis store, although it will be allowed to operate only 37 stores, the maximum permitted for a single retailer under provincial regulations in Year One, said James Burns, chief executive of Alcanna.

Some of its locations are in existing liquor stores run by Alcanna under banners such as Liquor Depot, which the retailer wants to convert to cannabis shops, he said. Rents for cannabis stores have as much as doubled at some sites – to roughly $65 a square foot annually – compared with the rate for a liquor store.

Despite the high rents, Alcanna will hang on to the best locations and bear the costs until more licences become available in Year Two, Mr. Burns said. In Edmonton, for example, the retailer has taken a lease for a store on the tony Whyte Avenue but doesn’t expect to get a licence for the site because of its chances in a lottery, he said. Still, Alcanna plans to build a cannabis education centre offering some accessories and other unregulated products to take advantage of the prominent site and try to build its brand, he said.

SmartCentres REIT, whose power centres are known for their Walmart Inc. stores, has signed more than 10 leases for cannabis shops on its properties and is negotiating for more, executive vice-president Rudy Gobin told analysts this week.

“There’s a lot of frenzy with people calling us up because we’re all over the country,” he said. “And as you know, this is not a product for consumption in urban markets only. It’s a consumption of products everywhere. So whether it’s for the elderly, for the sick and so on – so we’re getting a massive amount of interest, so we are in discussions with a lot of parties on this.”

Trevor Fencott, chief executive of Fire and Flower, an Edmonton-based retailer with four cannabis producers among its investors, also plans to operate cross-country where possible. The company has been signing leases for sites since last year, taking a risk that these locations might end up on the wrong side of future bylaw changes.

“Essentially it is a risk capital decision on our part,” Mr. Fencott said. “When you leap before things are entirely clear, obviously that’s risky but that’s what entrepreneurs do.”

To help make its cannabis shops more acceptable, Fire and Flower recently opened a concept store in Edmonton for landlords and regulators.

The store has many of the elements that other cannabis chains are striving for: an upscale look with, in this case, an “experience table” (a bar) and chairs around it, digital screens from which shoppers can find more information, “smell jars,” a reception area where shoppers’ identification and age are checked and “cannistas” – its version of café baristas – who mill around to help shoppers.

“We want our customers to be provided with an experience and perceive us more similarly to a Whole Foods store,” Mr. Fencott said.

But federal regulations forbid retailers from overtly marketing cannabis products and claiming a positive or negative effect of product use, while provincial rules ban them from stocking merchandise openly in the store, instead requiring that the goods be locked away in a secure showcase or back room. The pot itself must be stored in sealed containers to ensure no weedy odour.

It means that customers can’t ask staff to weigh in on the best type of cannabis to help them relax over a few hours of Netflix, said Mark Goliger, chief executive of retailer National Access Cannabis Corp. (NAC), which has teamed with Second Cup to run its standalone weed stores and plans to operate its own shops as well under the Meta banner.

NAC, which calls its staff educators or “cannapros,” will still train them on cannabis science and risks and “whenever possible fill in the blanks without stepping over the line,” Mr. Goliger said.

Nevertheless, the Nova Scotia Liquor Corp., which runs cannabis stores in that province, is mounting signs in its new shops saying “relax,” “unwind” and “enhance” and plans to promote various strains with words such as “soothing,” “relaxing and calming,” or involving “livelier experiences” that “invigorate the senses.”

At least one critic complained to Ottawa this week that the messages violate federal laws against promoting a glamourous or positive image. A Health Canada spokeswoman said the department is aware of the complaint and is working with the cannabis industry and governments on how its rules for promoting marijuana will be applied.

POTHOLES: RULES AND RISK

How cannabis retail is going to work depends on where you are.

While Ottawa is regulating cannabis production, store advertising and packaging, the provinces are responsible for setting a retail model, and wholesaling legal product to stores. In all but two instances, provinces will run the only available legal online stores. In provinces that are allowing private-sector retailers, such as Alberta, the municipalities control where pot shops can open through zoning and other development restrictions. The province completes the process by handing out retail-cannabis licences.

Five provinces and two territories will let the private sector open stores. (Ontario’s model is up in the air.) Saskatchewan will allow companies to distribute product to retailers, and both Saskatchewan and Manitoba will also let firms operate online stores, two jobs that other regions said they’d do themselves.

Alberta is an emblem of just how tangled the regulatory web has become, with a maze of rules in each municipality for who will be chosen to open stores, where they can be located and how they should look. For cannabis chains trying to build a brand from scratch, this is a challenge.

“Every town is different,” said Mr. Burns of Alcanna, which operates 229 liquor stores in Alberta, B.C. and Alaska. “There’s a lot to keep track of. It’s kept everyone on their toes.”

Red Deer, Alta. threw Alcanna for a loop.

“It’s been very much a build-anything-anywhere-you-want-kind of city,” said Mr. Burns. So, Alcanna had three sites secured, but its plans were scuttled after the city – the third-largest in the province – put zoning limits in place a few weeks ago that would make these locations non-viable.

“You go back to the drawing board,” Mr. Burns said.

Alcanna’s luck was better in Spruce Grove, Alta. The city required hopeful retailers to deliver applications in hard copy starting on different days in July. Because they would be considered on a first-come, first-served basis, lines formed outside city hall with people camping out as though “you’re waiting to get Rolling Stones tickets,” Mr. Burns said. Alcanna was second in line.

Retail fates in Edmonton were left to a random lottery that set the order in which applications would be processed.

But even once lotteries are won, more restrictions exist. For instance, the province requires at least 100 metres between a cannabis store and a school or hospital. Cities can add to these limits, shrinking viable real estate.

Then, there are rules around how close two pot shops can be from each other: Edmonton wants 200 metres, while Calgary says there needs to be 300 metres. In Banff, Alta., cannabis stores also can’t have windows that face a sidewalk.

Cannabis players can face Catch-22 situations. Aurora Cannabis Inc. has signed a lease for a relatively large – 10,000-square-foot – store in West Edmonton Mall, says Cam Battley, its chief corporate officer. The store will have an Aurora brand but be operated by Alcanna. (Aurora is an investor in Alcanna.) But Aurora is still working with the city to make it permissible to sell cannabis at the mall, where he also hopes to “create a world-unique experience” by offering yoga, cooking and educational classes, he said.

In British Columbia, which will allow a mix of private and government-run stores, several municipalities – Whistler, Tofino, Richmond, North Vancouver and Abbotsford – have moved to prohibit the sale of cannabis altogether.

For some, it’s just a matter of time. Many municipalities were advised by legal counsel to ban cannabis retail as a temporary measure to prevent companies from opening up shop before towns can set rules, said Tofino Mayor Josie Osborne. Instead of going through a lengthy rezoning process, as most towns are doing, Tofino is plans to issue temporary-use permits that last for three years and can be renewed for another term.

“It’s been a rush to get ready to meet the federal timeline,” Ms. Osborne said. “I know there’s a lot of pressure. I know I have felt pressure from people saying get your house in order, you’ve got to be ready. But I’d rather be cautious and take our time.”

On Tuesday, the final draft of Tofino’s policy goes to council for approval. Ms. Osborne expects the application process to open later this month or in September, with the surfing district set to permit as many as three marijuana stores toward the end of the year.

Brian Harriman, chief executive of New Brunswick Liquor Corp., said it will have 20 cannabis stores up and running on Oct. 17 after spending the past two-and-a-half years preparing for that day. The province saw it as an economic opportunity and quickly mobilized to make itself a cannabis-friendly destination.

The new stores will be a cross between an Apple store and a jewellery shop, with products locked away in modern cupboards and drawers, Harriman said. “If you didn’t know what was in there, it could be DavidsTea, it could be the Apple store.”

But navigating the regulatory waters wasn’t easy, he acknowledged. “It’s not been a black and white project, which is kind of what makes it fascinating but also what’s made it very challenging.”

AN UNCERTAIN FUTURE

Mr. Serruya wears multiple hats in the cannabis world.

His family’s private equity firm is an investor in Second Cup, where he’s leading its push to sell marijuana. His family firm also has stakes in cannabis producers such as Aphria Inc. and Scythian Biosciences Corp. And the Serruyas’ firm is landlord of a bevy of properties, including the Promenade mall north of Toronto, in which it wants to set up its own cannabis store, if Ontario allows privatization.

Mr. Serruya and other industry insiders are betting that the rules could change entirely in three to five years, becoming more relaxed and opening up new opportunities.

“What we’re trying to do as seasoned retailers is figure out where the puck is going as opposed to where it is today,” he said.

“How do we design our stores so it looks and feels cool to buy raw bud, pre-rolls and oils now, but be able to put in a fridge for food and drinks or a display counter for olive oil?” said Will Stewart, a vice-president at Hiku Brands Co. Ltd., which is looking to open cannabis stores in multiple provinces and last month agreed to be bought by Canopy Growth Corp. “We have to think of that now so we don’t have to renovate a year from now.”

But by then cannabis retailing could shift more online, making it even more competitive among brick-and-mortar stores, Mr. Serruya acknowledged.

Concept image of future products by the co-founders of Yogen Fruz.

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As for Oct. 17, don’t expect many marijuana stores to be open for business.

“Canadians will probably not be blown away by the feeling they get going into a retail environment on Day One,” said Dan Sutton, founder of Tantalus Labs, a B.C.-based grower of cannabis that is vying for a sales licence. “I think it’s going to get off to a rocky start.”

He doesn’t expect stores will have a lot of product offerings because most will likely have been hastily set up and staffed with people who don’t know their cannabis, he said. Bad experiences early on might push cannabis users back to the illicit market, especially in B.C., he warned.

The image problems persist. After Second Cup revealed its cannabis plans this spring, it received three letters from customers who said they would no longer patronize the cafes because they didn’t approve of it going into the cannabis business, Mr. Serruya said.

Nevertheless, people’s impressions can change. Even Loblaw has applied for and received licences to sell recreational cannabis at 10 of its Dominion supermarkets in Newfoundland. And its Choice REIT real estate business got the green light in New Brunswick to build a handful of cannabis stores on its properties.

“As an established retailer with a secure supply chain and decades of experience selling controlled products, including alcohol and tobacco, we believe there may be very select opportunities for our stores to sell recreational cannabis,” Loblaw spokeswoman Catherine Thomas said.

Liquor stores were once frowned upon as places that spread a sinful message. And many mall operators once turned their back on leasing their space to dollar stores because they feared their down-market look would sully their centres’ reputation, said Michael Zakuta, chief executive of mall owner Plaza Retail REIT. Now landlords can’t get enough dollar stores, he said.

Mr. Zakuta is moving cautiously into the cannabis world, having signed leases for three cannabis stores in New Brunswick. He believes they will bring more shoppers to his strip plazas. “That’s why we’re doing it,” he said.

Calgary real estate broker Mr. Kehoe said many landlords started accepting cannabis retailers in their properties when they saw that operators had relatively sophisticated retail plans without the stigma of the illegal dispensaries and ties to organized crime.

“And as Alberta goes, so will go Ontario,” Mr. Kehoe predicted. “Landlords are in the business of leasing space. As long as it is legal you’ll see them everywhere.”

It doesn’t mean that retailers won’t stumble in the coming months and years.

Shane MacGuill, an analyst at market researcher Euromonitor International, expects a rush of sales in the first couple of years but a slower pace of growth after that as an oversupply results in cheaper prices. He forecast cannabis sales will rise to about $10-billion in 2025 from $7-billion in 2019. Even so, Ms. Lee at Deloitte said pot-infused edibles, which are expected to become legal in the next year or so, will help pump up sales in future years because cannabis-infused foods and drinks don’t carry the stigma of smoking.

“It’s all a recipe for a very stuttering start,” Mr. MacGuill said.

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