On December 12, 2019, the Government of Ontario announced that it is moving toward an open market for cannabis retail beginning in January 2020. The sweeping amendments to the regulations under the Cannabis Licence Act (the Amendments) have updated the application process for cannabis retail licencing by abandoning the current lottery process and allowing any interested party to submit an application, including licensed producers (LPs) within the meaning of the Cannabis Act. The Amendments introduce a number of key changes, including changes to the cap on retail stores in the province, allowing cannabis retail stores to sell additional items and loosening certain restrictions on LPs. The Government of Ontario has articulated that they have implemented the Amendments with the goal of providing consumers with greater choice and convenience in hopes of combating the illicit market.
Increase in cannabis retail stores
As discussed in our previous Insight on Ontario's cannabis retail regime, the licensing required to operate a cannabis retail store is a two-step process. First, the applicant must be issued a Retail Operator Licence. Second, once the Retail Operator Licence is obtained, the store must receive a Retail Store Authorization in order to operate. Prior to the enactment of the Amendments, only winners of a "lottery" were invited to apply for a Retail Operator Licence. However, the Amendments have eliminated the lottery process, and the Alcohol and Gaming Commission of Ontario (AGCO) will start accepting Retail Operator Licence applications (other than those previously selected in the lottery) on January 6, 2020, and Retail Store Authorizations on March 2, 2020.
The Government of Ontario anticipates that Retail Store Authorizations under the new system will start to be issued in April 2020 at an anticipated initial rate of 20 per month. At first, licence holders will be able to own a maximum of 10 cannabis stores. This number will increase to 30 stores on September 1, 2020, and to a final maximum of 75 stores on September 1, 2021. The Ontario government has indicated that this phased approach will help ensure fair access to the cannabis market for retailers while creating medium to long-term market certainty. In addition, the Amendments have removed the regional distribution limits and retail stores may now be opened in all Ontario communities that have not "opted out" of the retail cannabis system.
A win for licensed producers
The Amendments also increase the ability of LPs to participate in the cannabis retail market. LPs (and their affiliates) will be permitted to apply to open a single cannabis retail store that must be located at one of their facilities. Additionally, LPs (and their affiliates) are now permitted to own or control up to 25 percent of a corporation holding a cannabis Retail Operator Licence. Previously, this limit was 9.9 percent, as discussed in our Insight on the cannabis retail regulations.
The Ontario government believes that these changes will enable more capital, experience and capacity to enter the market, resulting in more expedient rollout of cannabis retailer stores.
Additional products and "click and collect" now allowed at cannabis retail stores
The Amendments also enable retailers to sell additional cannabis-related items in their stores. Previously, the regulations permitted cannabis retail stores to only sell cannabis, cannabis accessories and shopping bags. Cannabis retail stores may now also sell any items other than a cannabis accessory that relate in some direct way to cannabis or its use, such as items that depict cannabis or its use, or that is wholly or partly cannabis themed, but not including any food or drink that is not cannabis. For example, such items might include cannabis cook books and magazines.
Last month, the Ontario government also announced that it would allow private cannabis retailers to offer their customers the option to "click and collect" their cannabis purchases, by purchasing the cannabis products online or over the phone, and picking them up in-store. These changes have now been formally adopted by the AGCO through amendments to its Standards for Cannabis Retail Stores. However, retailers are still not allowed to deliver online orders directly to customers, as the Ontario Cannabis Store continues to maintain exclusive control over online sales and delivery.
Dentons applauds the Government of Ontario for implementing the Amendments and expects that they will have an immediate and positive impact on all industry stakeholders. To date, the distribution of cannabis in Canada's most populous province has been widely criticized, as there are currently less than 25 cannabis retail stores open in Ontario (whereas there are already over 350 licensed retailers in Alberta). Assuming they are implemented successfully, we expect the Amendments will result in the rapid rollout of retail stores in Ontario and provide new economic opportunities for private businesses, while also combatting the proliferation of the illicit market. In this regard, we expect the immediate beneficiaries of the Amendments to be the following:
Ontario cannabis consumers
As of the date of publication of this Insight, there are only 24 licensed retail stores operating in Ontario. Assuming that the winners from the August 2018 lottery ultimately receive their licences, and the AGCO achieves their stated goal of 20 new licences a month commencing in April 2020, Ontario is poised to have up to 135 licensed store locations in operation by the end of June 2020. This will provide Ontario cannabis consumers with far greater accessibility to legal cannabis and should result in more Ontarians purchasing cannabis through legal channels rather than relying on the illicit market.
Cannabis retailers and private business
Ontario is now officially "open for business" with respect to adult-use cannabis. In this regard, the Amendments represent a lifeline for those want-to-be cannabis store operators, including those who intended to access the market prior to the announcement of the lottery process and have been forced to sidelines while continuing to incur costs, such as commercial lease payments. While the Amendments will likely result in immediate benefits to larger licensed retailers who are familiar with licensing procedures and have developed brand recognition from operations across Canada, we also anticipate that many entrepreneurs and emerging businesses will seek licences, bringing increased competition to the retail landscape. In addition, retailers will surely benefit from the additional items that are now permitted to be sold in retail stores.
Aside from the obvious benefits resulting from increasing the investment threshold from 9.9 percent to 25 percent, and permitting LPs to open a single retail location, we expect LPs across Canada will benefit from the Amendments, primarily because the Amendments will ultimately provide LPs with broader distribution of their cannabis products in Canada's most populous province. LPs have consistently pointed to the slow rollout of retail stores in Ontario as a primary factor for why sales figures have been underwhelming and why certain LPs have produced excess inventory. Accordingly, the additional stores to be opened in Ontario are expected to be an important catalyst for LPs as they seek to improve sales figures, move excess inventory, and develop market share and brand recognition. In addition, the Amendments are expected to be an important step in curtailing the illicit market, which will presumably result in more Canadians using legal channels to purchase cannabis products that have been produced by LPs (particularly with the enhanced product offerings now permitted with the onset of Cannabis 2.0).
To date, the model for the distribution of adult-use cannabis in Ontario has largely been perceived as a failure. The Amendments represent a significant step forward and should have a meaningful impact in combatting the illicit market, while benefiting all cannabis industry stakeholders and providing broader legal access to adult-use cannabis for all Ontarians.
Dentons' leading Cannabis group will continue to work closely with existing and new industry stakeholders who intend to participate in the Ontario cannabis retail regime, and provide frequent insights on these important developments.
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