Ontario pot shops open consumption spaces to lure customers as interest for lounges grow

A handful of legal cannabis consumption lounges are beginning to pop up in Ontario, spurred on in part by entrepreneurial retailers looking to provide a little extra incentive for customers to drop by their stores as the industry awaits further clarity from provincial policymakers.

While they are far from the famous quasi-legal coffee shops found in Amsterdam or the high-end restaurants found in Los Angeles, they provide an initial view of how a legal consumption space looks like in Ontario, just less than three years after pot was legalized in Canada. 

Laura Bradley, who opened The Bend Café and Lounge next to her cannabis store in Grand Bend, Ont., said in an interview that she wanted to provide her customers and the local community with an area that would allow cannabis to be consumed safely and alongside staff who are experienced and can help explain the products. 

The outdoor part of the cafe itself is located behind Bradley's licensed cannabis store and is shielded from the town's main thoroughfare to provide privacy with a capacity of about 50 people. As well, Bradley only allows cannabis that is purchased legally with an excise stamp and a receipt and doesn't permit anyone to bring in a product from the illicit market, she said. Representatives from the provincial retail regulator checked out her cafe area and didn't flag any concerns, she added. 

"The bottom line was meeting customer needs and then finding a way to meet all the rules and put some extra ones in place just to be cautious," Bradley said in an interview. 

While much has been bandied about the potential economic impact that cannabis lounges have, the reality is that there is little data to determine the benefit these consumption spaces will have on the Canadian industry. That being said, all signs point to growing interest and demand from Canadians to consume cannabis in a licensed and regulated establishment - be it an outdoor cafe, a restaurant, or an Airbnb-like retreat. 

Ontario began looking at the viability of opening consumption lounges in the province through a public consultation process that began in Feb. 2020, but there are no changes to the province's cannabis framework expected at this time, according to Natasha Krstajic, a spokesperson for the Ontario Attorney General. Krstajic also couldn't provide a timeframe when an update to the province's consultation on consumption lounges would be disclosed. 

For Richard Browne, adding some picnic tables in an empty lot right next to his Alchemy Canna Co. store in northern Toronto is part of a move to stand out from other competing pot shops and give customers an opportunity to "take a load off". 

"We haven't really put our minds to it but we just wanted to do this sort of as an initial kind of idea and see how popular it is, but the next step is we would design something that's similar to the inside of our store," Browne said.

"We're doing everything we can to optimise the business, especially because there's so many stores, so much competition."

Matt Maurer, a partner at Torkin Manes and co-chair of the law firm's cannabis practice, said much of the hesitation at creating these ad-hoc consumption areas are liability concerns, while it also doesn't appear to have much political support from policymakers who may argue that people can just consume their cannabis at home rather than a lounge. 

"The answer would be if there's a demand for it and we're starting to see that," he said. "Arguably the provincial and municipal governments would be better served to create a standardized set of rules that addresses any concerns they have rather than allowing these loopholes for stores or other businesses to be exploited."

While Bradley noted that she doesn't know if the cafe has resulted in a boost in sales for her retail store, she is optimistic that it will be the start of an alternative option for people who wish to unwind with a joint, rather than at the bar with a pint of beer. 

"People that frequent this place appreciate not feeling like a leper," she said. "They feel like they have a space where they're welcome that's meant for them. What about the people who don't consume alcohol, are they not allowed to have a good time? People who consume cannabis don't want to be down a dark alley, hiding in the corner."  
 

THIS WEEK'S TOP STORIES
 

Deals, deals, deals: TerrAscend, Valens lead weekly M&A activity

It was a busy week for M&A activity in the cannabis sector this past week with several major companies announcing a variety of deals. TerrAscend made the biggest splash in the week, paying US$545 million for Gage Growth Cannabis giving the U.S. multi-state operator a significant presence in Michigan, one of the biggest cannabis market's in America. Meanwhile, Ayr Wellness is moving into Pennsylvania after snapping up PA Natural for US$80 million, with an additional US$40 million to be paid based on performance over the next year. Planet13 Holdings, the owner of the largest cannabis dispensary in Las Vegas, is planning to bring its marijuana superstores to Florida after acquiring a licence to operate in the Sunshine State from Harvest Health & Recreation for US$55 million in cash. Closer to home, The Valens Company is going premium after announcing a deal to buy Citizen Stash for $54.3 million in stock. 
 

Merrill Lynch advisors now open to working with clients with cannabis exposure 

Merrill Lynch's wealth management division has opened the door to working with clients who own or invest in marijuana-related businesses, according to Advisor Hub. The financial advisor trade newssite reports that Merrill staff will be able to seek approval for clients with cannabis-related businesses, as long as they are deemed to be in "lower-risk situations", or which have a small amount of their net worth tied to marijuana businesses. The move is a stark change from policies adopted by many U.S. brokerages which restrict engaging in cannabis due to the federal illegality of the drug. Merrill's policy change is part of a broad-ranging effort to help address long-standing frustrations held by the firm's 19,000-odd advisors. 

Boston Beer strikes production, distribution deals for Canadian pot drinks plans

Boston Beer Company - best known for its Samuel Adams beer - is on track to make cannabis-infused beverages in Canada after picking two Canadian partners to help manage production and distribution for those products. Boston Beer's cannabis products will be produced by Windsor, Ont.-based Peak Processing Solutions and will be distributed by Entourage Health, formerly known as WeedMD. The companies agreed to a five-year deal, although terms were not immediately disclosed. Boston Beer's foray into cannabis is part of a previous announcement the company made in May when it disclosed it was forming an R&D hub for non-alcoholic based beverages. While cannabis-infused beverages have become a mainstay in the Canadian recreational market, they haven't generated significant market share with roughtly three per cent of the total market. 
 

Pot stocks lose half their value amid fading optimism of U.S. legalization

Pot stocks have lost about half their value from their highs earlier in the the year as stalling developments to legalize cannabis in the U.S. have led to an exodus of retail traders from the sector, Bloomberg News reports. The newswire reported that publicly-traded cannabis stocks rallied in the early part of the year following investor optimism amid high hopes of federal legalization while also getting a boost from the meme-stock mania that benefitted companies like Tilray and Sundial. Nowadays, cannabis stocks have pulled back due to waning interest with retail investor inflows down to US$73 million in the week of Aug. 16 from US$2.5 billion back in February. As Bloomberg notes, the changing fortunes of cannabis also shows how quickly a cult-like sector can go from hot to cold and back again.
 

Quarterly Results Wrap: Flowr, Harborside

Here's a summary of some of the cannabis industry companies that reported quarterly results this week: 

• Australis Capital: First quarter revenue up 2,652 per cent to $1.73 million, $1.58 million in an adjusted EBITDA loss, compared to a $1.43 million loss a year earlier.  (Release)  
• Flowr Corp.: Second quarter revenue down 6.1 per cent to $2.2 million, $7.5 million in a net loss, compared to a $5.4 million loss a year earlier.  (Release)  
• Harborside: Second quarter revenue up 0.5 per cent to US$15.3 million, US$1.1 million in adjusted EBITDA, compared to a US$2.0 million gain a year earlier.  (Release)  
• InterCure: Second quarter revenue up 304 per cent to $17 million, $5 million in adjusted EBITDA, compared to a $618,000 gain a year earlier.  (Release)  
   

​ANALYST NOTE - Desjardins on High Tide 

Dejardins Capital Markets Analyst John Chu initiated coverage on Canadian cannabis retailer High Tide with a 'buy-average risk' rating and a $15 price trarget. Chu notes that High Tide is the second-biggest retailer in the Canadian cannabis market by store count behind Spiritleaf with 93 branded stores, but also generates the highest EBITDA as well buoyed by five straight quarters of reporting postiive EBITDA. Cannabis retail is viewed as a "lower-risk" segment relative to the rest of the industry, which requires less capital and results in fewer write-downs and impairment charges. Chu also highlights that a "good portion" of High Tide's revenue comes from non-cannabis produts, which represent the majority of its international and online sales, and should be poised to benefit from a significant shift in e-commerce movement that has occurred as a result of the COVID-19 pandemic. 

CANNABIS SPOT PRICE: The CCSI was assessed at C$5.18 per gram this week, down 1.9% from last week’s C$5.28 per gram. This week’s price equates to US$1,863 per pound at the current exchange rate.

WEEKLY BUZZ:

$1.045 billion

- The amount of money spent by Canadian households on legal recreational cannabis during the second quarter of the year, a new record, according to Statistics Canada. The amount spent by households in the illicit market totalled $737 million in the second quarter, down from $757 million in the prior three-month period.