Ontario’s cannabis retail lottery will have just 25 winners. But is it a smart approach, or a golden ticket to nowhere?

Thestar.com
January 10, 2019
Joseph Hall

Combining at least two vices, aspiring pot merchants will enter a lottery Friday that will clear the way for a lucky 25 to open the province’s first cannabis stores in April.

The lottery, which will grant the winners first dibs at applying to the Alcohol and Gaming Commission of Ontario for recreational cannabis retail licences, has drawn the interest of thousands, industry experts say.

On Friday, the names of the winning people or companies will be drawn, says Ray Khanert, senior communications adviser with the commission. “And they will have five business days to commence their application process.”

Of the 25 winners, five will be able to open stores in Toronto, while only two will be serving the entire expanse of northern Ontario.

Khanert stresses the lottery -- which began accepting entrants at 12:01 a.m. Monday -- will not grant licences, but the mere right to seek one. And he says winners must subsequently prove to the commission they’ve made serious financial and planning commitments to their enterprises before they’ll be allowed to open a store -- with a firm April 1 target.

Among other things, they must have obtained a $50,000 line of credit and committed to a non-refundable $6,000 licence application fee.

On top of this licence fee there’s a $4,000 charge, also non-refundable, for a retail store authorization application -- which would set the location of their shop. But Khanert says many lottery winners may hold off on this until after Jan. 22, the last date Ontario municipalities can opt out of hosting cannabis stores.

Merchants who fail to open on time will face fines of $12,500 on day one and the same amount April 15. If still shuttered on May 1, they’ll be docked $25,000 -- the fine money being drawn from the required line of credit.

Khanert says the commission will deploy a large team to help any lottery winners who run into trouble, for example in securing the credit line. “This is all about doors opening in April.”

People convicted of some cannabis-related charges or members or supporters of criminal organizations are ineligible for retail licences.

But David Phillips, cannabis czar under the province’s former Liberal government, says he doubts any winners -- no matter their industry or retail backgrounds -- will be able to open by April 1.

“It’s a mountain too steep and too high for just about everybody,” says Phillips, who was acting head of the Ontario Cannabis Store under the former government. “Even the most prepared retail operators out there are really going to struggle to turn things around that quickly.”

Phillips, now a principal and general counsel with the public strategy firm Navigator Ltd., says the “golden ticket” winners will have to lease space, construct interiors, install security systems, buy inventory and hire and train staff -- and the 10 weeks before April 1 will likely prove too short a time.

The software to run the lottery was developed specifically by the commission’s gaming laboratory, Khanert says. The lab “is quite expert in its field and in addition to that the fairness monitor KPMG (Canada) looked at it,” as well as another third party in the U.S.

Khanert says the commission did not keep a running tally of lottery entrants -- who had until noon Wednesday to jump in -- and will not publish results until the winners are revealed Friday evening or Saturday. A source told the Star there were 6,000 entrants.

Matei Olaru, CEO of the cannabis information and resource firm Lift & Co., says he’d assume entrants would run into the thousands, in large part because the stores are almost certain to be lucrative.

But Khanert says rules will prevent winners from making flips until the scheduled lottery period runs out Dec.18.

“Your selection is not transferable,” he says. “The name that is on the (lottery entry), whether that is an individual or a corporate entity, that must be the name that applies for the licence.”

A list of all entrants and where they placed in the lottery draw will also be published in the near future, Khanert says. This will be used to determine the order of later store openings until December, unless the province opens up the process beforehand, he says.

Lottery rules hold that companies and individuals -- and any people or entities affiliated with them -- are allowed only one entry in each of the five regions set up across the province. They can only win in one.

These include Toronto, allotted five stores; and the surrounding GTA regions, which have a total of six.

An East Region runs from Ottawa through Peterborough and cottage country (five stores); a West Region spreads out from Hamilton and Niagara, through to Lake Huron and up to Manitoulin (seven stores). Meanwhile, a North Region -- which takes in the vast reaches from Nipissing over to Thunder Bay -- will have a total of two.

The province had envisioned a free-for-all April opening, with any merchant who met licensing criteria able to open stores virtually anywhere. But an unexpected lack of product caused Premier Doug Ford’s government on Dec. 13 to drastically pare that back to 25 and introduce the lottery scheme.

The move was applauded by some industry players, scorned by others.

“The Ontario government was extraordinarily reckless,” says Darren Bondar, president and CEO of the cannabis store franchisor Inner Spirit Holdings. “This lottery process, where anybody and their dog can apply for $75 (the lottery entrance fee) is a complete farce,” says Bondar, whose company runs some 20 pot stores in Western Canada.

Bondar says the former, unlimited licensing rules lured companies such as his into planning and financial commitments. And the abrupt switch, he says, left his company holding about 30 superfluous leases across Ontario.

“It put a lot of companies in a very difficult position,” says Bondar, who has not decided whether to quit the leases or open cannabis accessory shops in the locations until the supply shortages end and licensing regulations are loosened.

But Omar Khan, vice-president of public affairs with Hill + Knowlton Strategies Canada, says the measured store rollout is justified given supply shortages and that it will help Ontario avoid the disastrous openings experienced in other provinces -- where shops have gone bust due to insufficient wares.

“I think the government generally has moved in a cautious but appropriate direction here,” says Khan, whose company advises clients in the cannabis industry.

Although the lottery helped the government avoid any perception of favouritism, Khan says when supplies recover, the province should move away from strict adherence to to the list of all entrants.

But Toronto lawyer Matt Maurer says Ontario might have been better off opening stores with the understanding they may not have any cannabis to sell.

“I think that’s one model and I don’t see anything wrong with that,” says Maurer, who has a cannabis practice at Torkin Manes LLP. “Go ahead and open your stores, we can’t promise you anything, but as soon as the supply crunch is alleviated you’ll have the supplies.”

Maurer says this model would favour deep-pocketed businesses who could better weather supply shortages. He says large, experienced firms can more likely deal efficiently with the heavy regulatory burden on the stores.

“It’s one thing to encourage small business, it’s another thing to allow people who have had no business experience at all suddenly walk in and try to open these stores,” he says.

Olaru, the Lift CEO, says that the province’s go-slow strategy with the stores is appropriate and reflects the approach new cannabis users should take with the drug.

“If you think about what you hear about cannabis it’s start-low (in THC concentration) and go-slow with consumption,” he says.

“And perhaps ‘start low, go slow’ with cannabis retail is also a prudent approach.”