Some Ontario cannabis stores to close doors by 2022: BMO analyst
Analysts are beginning to sound the alarm on the high number of cannabis retailers operating in Ontario and expect some stores to close for good over the next year.
BMO Capital Markets Analyst Tamy Chen said in a note to clients Wednesday that closures for some of the 1,200-odd licensed cannabis retailers in Ontario will likely occur in 2022, given how many of them are located in the Greater Toronto Area.
"We are worried that 2022 could be a year of retail closures in Ontario," Chen said. "Unless more municipalities opt-in for cannabis stores, this could lead to a (year-over-year) decline in industry sales."
The sudden rise of legal pot stores in the Toronto area over the past few years has been hard to ignore as many have opened their doors close to or right next to each other in certain neighbourhoods. The result has seen many retailers, notably those which aren't owned by larger companies or franchises, struggle to generate enough sales to be competitive.
According to the Alcohol and Gaming Commission of Ontario (AGCO), which regulates cannabis retailers in the province, out of the 1,143 licences that have been issued in the province, there were 368 pot stores operating in Toronto as of Oct. 12. RBC Capital Markets estimates that there are 2,369 licensed pot stores open across Canada as of Oct. 2021.
Since it allowed anyone to apply for a cannabis store licence in Dec. 2019, the AGCO has taken a hands-off approach and allowed the free market to determine which retailers will be successful. Some Ontario municipalities, such as Mississauga, Vaughan, and Richmond Hill, have opted to forbid pot stores from opening within their jurisdictions, forcing some retailers to open doors along streets bordering their city limits.
Chen said that retailers are seeing "meaningful" margin compression, with stores generating gross margins in the low-20 per cent range from mid-30 per cent a year ago, a trend which is unlikely to abate soon.
"It is hard for us to envision independent mom-and-pop retailers being able to generate sustainable profits in such an environment," she noted.
Meanwhile, RBC Capital Markets Analyst Douglas Miehm said in a recent report that the average monthly sales per marijuana store in Canada has now fallen to less than $200,000 in August, compared to nearly $300,000 two years earlier.
"Given the cannibalization of sales from existing stores and legal pricing declines, we would expect future retail store closures as some retail stores may lose economic viability," Miehm said.