Ontario’s decision to reverse course on retail pot store licensing could be a significant blow to the nascent sector, according to industry insiders, as government officials cite a nationwide supply shortfall as the reason for limiting the shops that can open in April.

Ontario announced late Thursday that it will limit the number of licences it will grant to retail stores selling legal cannabis to just 25 across the province and will disperse them in a random lottery draw that will take place next month. Previously, the current Ontario government said it would only cap the number of licences to 75 per operator as it expected more than 1,000 bricks-and-mortar stores to open their doors in April. Cannabis will still be sold online from the provincially-run online Ontario Cannabis Store.

“For the most part, there’s a lot of companies doing some soul-searching right now and are licking their wounds,” said Chad Finkelstein, a partner at Dale & Lessmann, who advises several cannabis producers and retailers on their retail strategy.

“Before the announcement, Ontario gave everybody the impression it was open for business, especially for cannabis retail. This appears to be the opposite of that now.”

Two months after Canada allowed the sale and use of recreational cannabis, the decision to legalize the drug has turned out to be more popular than anyone could have imagined. While cannabis producers across the country are rushing to build facilities to ensure adequate supply, demand for legal pot has outperformed expectations, leading to inventory shortfalls that some industry insiders believe will persist for the next two years.

Dave Martyn, president of Compass Cannabis Clinics, told BNN Bloomberg in a phone interview Friday that despite having the financial backing to open up the maximum amount of stores in Ontario, the uncertainty in the countrywide market prevented him from signing any leases in the province.

“Retail is not for the faint of heart,” he said. “Last night was complicated and it was emotional,”  Martyn said, noting that after observing how Alberta recently suspended new licence applications for cannabis stores, he wasn’t surprised to see Ontario change its own retail plans.

“The market got so out of hand so fast, we pulled back,” he said. “We saw what happened in Alberta and it’s a bloodbath there.”

Alberta’s cannabis regulator said last month it has received approximately 20 per cent of the marijuana it ordered from producers and had to suspend new retail applications to ensure existing companies would have enough inventory to sell to their customers. Quebec said it would close its provincially-run stores between Monday and Wednesday and limit hours for the rest of the week until product shortages have stabilized.

Alcanna Inc. (CLIQ.TO) Chief Executive Officer James Burns told BNN Bloomberg in a television interview Friday that given the supply issues that Alberta has already experienced in the early weeks of legal cannabis, Ontario’s decision to limit licensing to just 25 stores at the start makes sense.  Alcanna also suspended its quarterly dividend on Thursday to maintain free cash flow for its nationwide cannabis store development as well as liquor store expansion in Alberta, a move that sent its stock tumbling down as much as 23 per cent on the Toronto Stock Exchange.

“We don’t have product in [our stores],” Burns said. “We have days where the shelves are completely 100 per cent bare. We’ll get a shipment in once a week and it takes a day or two to sell out.”

Chris Bogart, chief executive officer of Choom Holdings Inc., said the company had 20 leases in Ontario ahead of the province's plans, but that those contracts were all conditional on whether the retailer would be able to secure licences in the province.

“We protected ourselves very well,” Bogart told BNN Bloomberg in a phone interview. He hopes to win at least one location in next month’s lottery and to have “multiple” locations ready to open their doors when the restrictions on licences are eventually lifted.

“We’re confident in our approach but there’s obviously some, let’s call it growing pains in the start of the market,” he added.

RioCan Real Estate Investment Trust, one of the biggest commercial real estate operators in the country, has signed leases for 26 locations in the province, said Ed Sonshine, chief executive officer at the company, in an interview with BNN Bloomberg Friday.  

“From a RioCan perspective, the worst that can happen is that they all disappear,” Sonshine said. “I think there’s going to be a much slower rollout because of the supply issues that take up the rest of 2019 until the full complement gets going.”

Finkelstein said pot retailers already had to pay above-market prices for store locations, given the high demand for the few available areas that abided by the restrictions municipalities plan to enforce, such as the distance stores will be from schools. Those retailers will now have to make a decision whether to vacate their lease or operate as a store that sells cannabis accessories until they eventually get a proper retail licence to sell legal pot.

“It’s not happy news to wake up to,” he said.

Michael Garbuz, chief executive of Vision Advisory, a cannabis consultancy firm, said the move is a “huge blow” not only to entrepreneurial retailers looking to enter a market eager for legal cannabis but also to the dozens of licensed producers who were relying on adequate retail storefronts to get their products into customers' hands.

“It’s pretty paternalistic of the Ontario government to strike these new licensing plans,” he said in a phone interview with BNN Bloomberg. “They should let the market sort itself out and let businesses with a good understanding of the pot industry decide what’s best for them.”

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.