David George-Cosh

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Canada needs to open as many as 4,000 cannabis stores, more than triple the current number of licensed outlets, if policymakers want to eliminate the illicit market, according to the head of one of the largest marijuana retailers in the country. 

Trevor Fencott, chief executive officer of Fire and Flower Holdings Corp., said that Canada would need to mirror what other legal markets such as Colorado have done to compete directly with the illicit market, where one cannabis store would be open for every 10,000 people served. That would result in Canada needing to open about 3,500 to 4,000 cannabis stores.

"The most efficient market out there is the illicit market. It's not regulated, but it is efficient," Fencott said in a phone interview with BNN Bloomberg. "Prohibition or enforcement alone don't work. You need to compete with the illicit market head-on economically."

Canada has just shy of 1,000 licensed cannabis stores across the country less than two years after legalizing recreational pot. Ontario, the most populous province and largest consumer market in the country, just surpassed the 100-store mark last month. Meanwhile, the illicit market still controls roughly 70 to 80 per cent of all cannabis household spending in the country, according to Statistics Canada. 

In addition to the massive proliferation of licensed cannabis stores, retailers would also need to take over delivery and wholesale buying from provinces to help keep costs down and make products priced more competitively with illicit players, Fencott said. Provincial governments, specifically in British Columbia and Quebec, need to do a better job of opening more retail stores, he added.

"We need to have our own ability to buy wholesale and deliver because that's what the illicit market does," he said. "Until that happens, it'll just be harder for us to compete with them." 

Fencott's comments come after his company struck a deal with convenience store giant Alimentation Couche-Tard Inc. to co-locate some Fire & Flower locations next to Circle K outlets. The deal will begin with a pilot project where two pot shops are carved out of existing Circle K convenience stores in Calgary and Grand Prairie, Alta., but will be fully enclosed and secured to abide by regulatory requirements. 

"The way we see this going is that cannabis is ultimately going to be a convenience commodity," Fencott said. "You have to give people multiple access points to the product that they want to buy, especially if you want to compete with the illicit market." 

Alimentation Couche-Tard owns a minority stake in Fire & Flower but also owns warrants that would give the convenience store operator majority control of its cannabis retail partner. Fire & Flower is also able to use Alimentation Couche-Tard's real estate team to help identify co-located stores, Fencott said. 

Fencott said that the two companies have already identified a "significant number" of Alimentation Couche-Tard convenience stores to expand the pilot project across the country. He didn't provide specific figures on how many stores they plan to co-locate with Circle K, but noted they plan to explore options in Saskatchewan and Ontario. Alimentation Couche-Tard has about 2,100 Circle K, Couche-Tard and Mac's stores in Canada. 

"For us to get to operational break-even, you need to think what is the best bang for your buck," Fencott said. "Can you service your customer more efficiently with a smaller location. We think we can do that." 

The store expansion will likely help Fire & Flower reach its target of opening 78 licensed cannabis stores in the country by the end of the year, which would make the company the largest pot store operator in Canada. Fire & Flower has nearly 50 cannabis stores open in Canada. 

Altacorp Capital analyst David Kideckel said in a note to clients on Monday that the announcement provides an "indication that the partnership is progressing well and that both companies are strategically aligned."​

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the ongoing growth of the Canadian recreational cannabis industry. Read more here and subscribe to our Cannabis Canada newsletter to have the latest news delivered directly to your inbox every day.