David George-Cosh

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Selling Canadian coffee shop Second Cup Coffee Co. will give Aegis Brands Inc. a stronger balance sheet to pursue future M&A in the cannabis retail sector, the head of the company said. 

Aegis said in a release on Monday that it will sell Second Cup to Quebec-based Foodtastic Inc. for $14 million, plus a post-closing earn-out. There are 231 Second Cup outlets in Canada, according to the company's most recent quarterly report, 31 of which are corporate-owned.

The sale will mark the end of Second Cup's four-decade-long run as one of Canada's biggest independent coffee shop franchises. Second Cup has seen its market share dwindle in recent years amid the emergence of stronger competitors like Starbucks Inc., McDonalds Corp, and Restaurant Brands International Inc.'s Tim Hortons. 

Steven Pelton, chief executive officer of Aegis Brands, said in an interview that he expects the pot retail space to consolidate given the large amount of stores in Alberta and Ontario.  Alberta has 566 pot shops, while Ontario recently surpassed 400. 

"We think we're well positioned to compete with anybody but I think there's going to be opportunity to bring some companies together and build a platform of [cannabis] retailers," he said. 

Aegis owns and operates the Hemisphere Cannabis retailer with four locations in Ontario and another three yet to be licensed by the provincial regulator to sell recreational cannabis. More stores are in development, Pelton said.  

Cannabis retail deals have come fast and furious in recent months following Alcanna Inc.'s move last month to spin off its cannabis retail division and merge it with YSS Corp. Other deals include High Tide Inc.'s acquisition of rival Meta Growth Corp. in August to create the country's biggest retailer, while Fire & Flower Holdings Corp. bought Toronto-based Friendly Stranger Holdings Corp. in November. 

The deals come as the average annual revenue generated by Canada's pot shops reached roughly $3 million, according to a recent report by Stifel GMP. That's more than a tenfold increase compared to what Aegis would see in sales for the company's Second Cup stores, according to its most recent financial results. 

"We want to make sure that we're taking a holistic approach on how to grow the cannabis business," Pelton said. "I think you think you'd be doing yourself an injustice if you only looked at organic growth or only looked at acquisition. I think you got to look at both."

Pelton said that Aegis' Bridgehead coffee shop chain could fill the void of some of the 300-odd Starbucks Corp. outlets that have recently closed in Canada. Those coffee shops could be positioned for a spike in sales once people return to their offices following the end of the COVID-19 pandemic, he added.

"We know there's a strong demand for people that want to get their coffee with more of a conscience and I think we can do really well in filling people's social needs when it comes to coffee as well," Pelton said.