Loblaw mulls sale of recreational pot across Canada, sources say

Loblaw Companies Ltd. has held exploratory discussions with several major Canadian marijuana firms as the country’s largest retailer mulls developing a broader strategy to sell legal recreational cannabis nationally, according to multiple people familiar with the matter.

The company is focusing on jurisdictions that will allow marijuana to be sold through the private sector, including all three Western Canadian provinces, but has yet to strike a supplier deal with a producer or formally apply for a retail license in those provinces, the sources said. One of the sources said Loblaw was also considering selling legal marijuana online as part of its strategy, but those plans have been shelved for now.

On Tuesday, the Newfoundland and Labrador Liquor Corporation disclosed Loblaw has submitted an initial application to allow up to 10 of its stores to sell recreational marijuana throughout the province. That move is viewed by some retail analysts as a test model for Loblaw’s national cannabis ambitions as it would complement its expertise selling alcohol and cigarettes.

The provincial liquor regulator said it will proceed to the next phase of the application process for any qualified applicants, including Loblaw’s, to become licensed cannabis retailers.

“In the provinces that will sell marijuana through a retailer, it would be a great match for Loblaw,” said Bruce Winder, co-founder of the Retail Advisory Network, a retail consultancy. “Customers would accept a company like Loblaw selling marijuana if they do it in a responsible, mature way.”

Loblaw announced last December that its Shoppers Drug Mart division also signed supply agreements with several producers including Tilray Canada Ltd., Aphria Inc. and MedReleaf to sell medical marijuana conditional upon Health Canada’s approval of the pharmacy chain’s dispensary application. Loblaw applied for a license to dispense medical marijuana in October 2016.

Loblaw spokeswoman Catherine Thomas said in an emailed statement to BNN Bloomberg that the retailer’s current focus is to distribute medical marijuana through its pharmacy business. She declined to confirm whether Loblaw is exploring recreational opportunities beyond Newfoundland and Labrador.

Most Canadian provinces are currently reviewing which retailers will be permitted to sell recreational cannabis.  

“We have been named among the qualified applicants to sell recreational cannabis in one province. There are more steps to come and it’s premature to discuss details or outcomes,” Thomas said.

British Columbia and Saskatchewan have yet to fully disclose which retailers will sell recreational marijuana in those provinces. The Alberta Gaming and Liquor Commission has listed more than 450 applications so far for cannabis retail stores in the province but Loblaw isn’t one of the current applicants. Manitoba’s government announced in February it has conditionally accepted proposals from four groups that will be awarded an undetermined amount of retail stores in the province. Ontario, Quebec, Nova Scotia, New Brunswick and Prince Edward Island all plan to sell recreational marijuana through provincially-managed retail stores.  

According to a cannabis producer that has held supply talks with Loblaw but was not authorized to discuss the matter publicly, the retailer could pause plans to apply for a provincial cannabis retail license in company-operated stories if the initial rollout in the private sector faces issues such as supply shortages or licensing and zoning disputes. 

“There’s going to be a lot of money in the recreational space and Loblaw is interested in being where the money is,” the executive said.

The federal government is aiming to legalize recreational marijuana later this year.

If Loblaw does develop a retail strategy, it may eschew selling cannabis in flower or oil form, and instead focus on selling edible products such as baked goods or candies where the retailer can generate higher margins and control costs more efficiently, according to an executive with one cannabis producer. The sale of cannabis-infused edible goods will take place one year after recreational marijuana is legalized, according to an amendment of the law currently being tabled in Parliament.

Another executive with a major cannabis producer said it broke off early discussions with Loblaw to sell recreational marijuana after the retailer demanded buyer-friendly rates the supplier refused to agree on.

Canada’s legal recreational cannabis market could reach $6.5 billion in retail sales by 2020, outstripping the amount spent on spirits and putting it within striking distance of the amount Canadians spend on wine, according to a research report by CIBC analysts released earlier this week.

The CIBC analysts estimate that recreational cannabis retailers could generate revenue of about $2.40 a gram at about a 30 per cent gross margin and an after-tax return of about 20 per cent once licensing, labour and other costs are factored in.

Loblaw is not the only major Canadian retailer that has expressed interest in the recreational cannabis space.

Alimentation Couche-Tard Inc. CEO Brian Hannasch told analysts in November that the convenience store chain’s Circle K brand could be a “good partner” with provinces in the cannabis space, given its experience selling liquor and cigarettes.

Meanwhile, Metro Inc. spokeswoman Marie-Claude Bacon declined to comment on the company’s position on cannabis legalization. An Empire Co. spokesperson also wasn’t immediately available for comment.

The most successful cannabis retail stores will be those that offer an attractive combination of price, service, ambiance, location and product, CIBC analysts John Zamparo, Prakash Gowd and Mark Petrie wrote in the report.

“Price will certainly be critical, but we suspect stores will have relatively similar pricing, allowing them to compete on other factors, and much like in any other retail concept, execution will be the key differentiator.”