In December 2018, anticipating a cannabis retail boom in Ontario, aspiring retailer mihi held leases on 42 empty locations across the province.

Locked into contracts, the company was ready to be among the province’s first retail operators. That same month, however, citing a cannabis supply shortage, the Ontario government did something it had maintained it would not do. It capped the number of retail stores at 25, and introduced a much-maligned lottery system to allocate those licences.

While many businesses had already signed leases, completed market research and drawn up floor plans, none of that mattered in a lottery system. If an applicant had $75 and a passing interest in cannabis, they could apply for a licence.

Like many other aspiring cannabis retail operators, mihi was not selected and was left holding the bag on multiple leases with an uncertain view of the future.

“It was rough,” Steffen Schenk, president of mihi, tells The GrowthOp. “We were holding on to the leases for a long, long time.”

Eventually, the company was able to renegotiate some leases, terminate others and rationalize its portfolio down to 10 locations. It was also fortunate to receive major investment from BlackShire Capital Corp., which helped keep the lights on as mihi played the waiting game.

Then, in December 2019, the Ontario government announced it was scrapping the lottery system and, instead, moving towards an “open allocation system.” In March, mihi received its retail operating licence and earlier this month, finally, it opened its first store in Burlington.

“It took us two years to get there, but we’re finally a retailer with an actual store,” Schenk says. “It feels nice.”

Inside mihi’s Burlington store, which opened on Sept. 2. / Photo: mihi Instagram

The story of mihi is one that is familiar to many Ontario-based cannabis businesses that have been hung up in the authorization process, waiting months, if not years, to get their doors open. Earlier this month, the Alcohol and Gaming Commission of Ontario (AGCO) vowed to double its approval pace and authorize 40 stores a month, which is a welcomed change for the more than 500 stores that are currently marked as ‘In Progress’ on the AGCO website, a status that means the store is in the queue, but could still be months away from opening.

And while getting the doors open is one thing, keeping them open — amid a global pandemic, long timelines and delays, and an increasingly crowded playing field in certain jurisdictions — is another.

We signed some leases going, ‘You know, that’s a great location,’ having no idea that six other companies also thought it was a great location.

 

On Aug. 1, The Neighbourhood Joint opened its doors in Toronto’s east end, in the heart of the Beaches. It was an 11-month process that was “challenging, stressful and rewarding all at the same time,” says the store’s co-owner, Andrew Rhodes. 

Rhodes praises the work that the AGCO is doing and sympathizes with the mountain of paperwork in front of it as it works through a backlog of applications, but he was surprised about the lack of transparency regarding store locations. He points a few kilometres down the road to Queen and Riverside, where four stores are operating in close proximity at “no fault of their own,” he says.

“Because of how the process is set up, you could have another retail cannabis store opening next door to you and you wouldn’t know until they are added to the AGCO’s map of authorized stores,” he explains. “There was no way to find out where other stores would be opening until they were practically ready to open.”

The increasingly competitive landscape in Toronto means retailers also need to find ways to stand out. For The Neighbourhood Joint, that solution was found in the past.

A key design element of the store is a pneumatic tube system, which allows stock to be brought up from the basement to the counter in seconds. It’s the same technology that Toronto city hall reporters used to file their stories across town in the 1930s.

And while many operators are tasked with building brands and operations from the ground up, others are hoping to cash in on years, or decades, of experience.

James Jesty is the president of Friendly Stranger Holding Corp., which operates cannabis retail stores under three banners, Friendly Stranger, Happy Dayz and Hotbox. Some of the original store locations have been converted, while other locations were built out, but all three banners have existed in previous incarnations for decades.

Friendly Stranger first opened its doors on Queen Street 26 years ago, Jesty says. There were significantly fewer storefronts vying for the attention of cannabis consumers in those days.

FILE: The Friendly Stranger, on Queen St. W. in Toronto, has been around since 1994. / Photo: Jack Boland/Toronto Sun/Postmedia Network Jack Boland/Toronto Sun/Postmedia Network

“When you look at the map, the good locations have many sites, and many more stores coming in,” Jesty tells The GrowthOp. “We even fell into that. We signed some leases going, ‘You know, that’s a great location,’ having no idea that six other companies also thought it was a great location. Stores are popping up all around now. Some will find their way but, unfortunately, some will not make it.”

Operating throughout the pandemic, Jesty says the customer peak-spend from early in the pandemic has softened, a drop in sales he attributes, at least partly, to the Ontario government revoking the short-lived emergency orders that allowed retailers to offer delivery and curbside pickup.

“That was a really good piece of business that seemed to be developing and really was helping us,” Jesty says. “And then, for whatever reason, they decided to take that away from us. That hurt. That was the one that hurt probably more than anything.”

And though customers can still order online and pick up their products in-store, it’s not quite the same as store employees bringing pre-ordered products outside and dropping them in the trunk of consumer’s vehicles, contactless and stress-free.

“The OCS (Ontario Cannabis Store) having a monopoly on delivery is bad for business,” Jesty says. “We should be able to compete because I believe that’s what the consumer still wants, especially if we’re being asked to buckle down and not go out. Why shouldn’t we be able to deliver?”

Still, for other aspiring retailers who have not yet received their final approvals, they can only watch on from the outside. Dimes, located on Queen Street West in the Trinity-Bellwoods neighbourhood, is one such business.

“We’re basically just waiting. We’re completely built out and just in the queue waiting to get approved,” says owner J.P. Adamo, who owns the location outright. “I’m fortunate that I own the building so there’s no rent pressure there, it’s just an internal accounting piece,” Adamo says.

He started renovating the proposed store in April and the first inspection was in mid-August. The store has been ready to open since then. Originally, the AGCO told Adamo that he was not likely to receive final approval until March, but recently it bumped that up to December.

“Hopefully, the AGCO is going to stick to that timeline,” Adamo says. Until that day arrives, he says the small boutique shop is “burning through cash. But at least I see the light at the end of the tunnel.”

FILE: People gather outside at the Fire and Flower pot store on Apr. 1, 2019 in Ottawa, Ontario. / Photo: MICHEL COMTE/AFP/Getty Images MICHEL COMTE/AFP/Getty Images

George Smitherman, CEO of the Cannabis Council of Canada, says that some of the challenges faced by retail operators mirror those face by licensed producers, mainly that they need to spend a lot of money to have any chance at making any.

“You have a lot of pressure for expenditure and a lot of clock-ticking before you get the point where you are generating any revenue,” Smitherman says. “That’s a hard business.”

He says he’s enthusiastic about the ramped-up retail pace, but he’s also mindful of the entrepreneurs who are still waiting to open or have already been forced to fold their hands and walk away.

“There’s a lot of people out there where the clock is ticking just too slowly for them so we’ve got to hope for continued progress on the store rollout front for the sake of our entrepreneurs and for our consumers,” Smitherman says.

As for mihi, the two years that passed as the company waited to open its shop gave them ample time to focus on the customer experience, something Schenk hopes will be evident to first-time visitors.

Education, in particular, is a key focus, he says. The store offers workshops on everything from terpenes and topicals to joint-rolling instructions and sessions about parenting and cannabis.

The company has also changed its approach to competing in the cannabis retail sector. “We switched our thinking over,” Schenk says. “We realized we don’t need 75 stores next year or the year after. I’m actually fine with just having high-producing stores, and if that means that I only have 10 stores, then I’m okay with it. We are going to grow much more organically rather than trying to go for rapid scale-up with four or five stores a month.”

In November, mihi will open its second location in Stoney Creek, Ont. Schenk predicts that by early next year the cannabis retail sector in Ontario will be “close to an open market.”

“That’s where we want to be. I think that Ontario will become incredibly competitive, and we can already see it in pockets,” he says, pointing to downtown Toronto as an example.

“I’m looking forward to the competition,” he adds. “Because ultimately, that’s when good operators and good retailers will not just survive, but they’ll thrive.”