- With the advent of legalization, Canadian cannabis stocks move in a new direction
- Analysts believe the boom will go on, but the focus will shift to retail, as the supply chain prepares to meet demand
- Aurora’s second investment total is $27 million in cannabis retailer Choom indicates where the market is heading
The next big play in the cannabis space will likely pivot to retail.
As the October 17th legalization date approached, the big cannabis companies involved in cultivation and production saw their share prices balloon. Since the legalization date, however, those cannabis stocks have taken a hit, as investors focus has shifted from potential to profitability.
And while some analysts have questioned whether the cannabis gold rush is over, others are focusing on the next phase for legalization, accessing the estimated $6 billion market up for grabs with cannabis consumers in Canada and getting enough stores open to satisfy demand.
With the large licensed producers (or LPs) hemmed in by regulation preventing them from vertical integration, the logical step for investors looking to capitalize on cannabis legalization is figuring out who can win at retail.
“[Aurora’s investment] helps accelerate our growth and expand our retail footprint to be one of best positioned and largest retailers in the country.”
— Chris Bogart, President & CEO, Choom
Investment Opportunity Shifts from LPs to Retail
Canada is less than a month into legalization and right now, demand is vastly outstripping supply. Based on estimates of the pre-legalization market, recreational cannabis is a potential multi-billion market with already built in demand and an infrastructure that needs to be built out.
Canadian retailer valuations have not yet seen the boom experienced by the large LPs and cultivators, but the focus is about to shift to the retail sector. Cormark Research points out that there are investor visibility issues for the new sector of retail right now as the focus has been on LPs. Investors looking to catch the next wave for cannabis stocks may find it in retail.
In assessing potential winners in the space, the emphasis will be on well-capitalized players who have managed to get a jump on the provincial licensing regulations for retail. The three biggest markets are Ontario, Alberta, and British Columbia, meaning to enjoy success, retailers will need a footprint in as many of these provinces as possible.
The rules that the provinces have set up around retailers mean that latecomers to the application process will encounter significant barriers to entry. Plus, in an attempt to avoid the Beer Store situation in on Ontario, in which the big brewers own the distribution channel in the province, many provinces have barred cannabis LPs from owning retail.
And while there is outside interest from large retailers outside of the cannabis industry, at this point licensing, regulations and store radius regulations provide significant barriers to entry, meaning latecomers will have to buy their way in to the market.
Retailer Choom Gets Big Endorsement from Aurora
One of the big LPs, Aurora Cannabis, has elected to gain exposure to the retail space by investing in Choom Holdings Inc. (CSE: CHOO), an up-and-coming retailer.
Choom, a retail company that has secured one of the largest retail networks in Canada, announced last week that Aurora had agreed to support the company with a $20 million debenture and the right to take up to a 40 per cent interest in the company at $2.75 per share.
Choom was named for the Hawaiian term for smoking marijuana, it also has links to the “Choom Gang”, a group of pot-smoking friends in Hawaii in the 1970s. Choom has secured the rights to 45 retail opportunities across Canada. Choom President and CEO, Chris Bogart commented, “[Aurora’s investment] helps accelerate our growth and expand our retail footprint to be one of best positioned and largest retailers in the country.”
Canada’s retail market is in its infancy, with limited licensing and stores open right now. Early retail adopters will own a market that, thanks to provincial regulations, will have high barriers to entry.
With legalization now a fact, the large growers that were the beneficiaries of the first part of the cannabis gold rush have gone from being valuated on potential and to having to make profits. Looking at the space and the limitation to direct participation, Aurora has placed a bet on Choom to drive the potentially more lucrative retail side of the business.