If you walk along Queen Street West in Toronto, you will see a cannabis store. And then another one. And yet another one. In fact, there are blocks of West Queen West (as locals call it) with so many stores that their pins literally overlap on Weedmaps.
At first glance, this is a dream for cannabis buyers, who have their choice of literally hundreds of retailers throughout the city. But if you look a little bit closer, it may actually be a harbinger of bad news for the owners of these shops. That’s because the “gold rush” of April 2019 — when there were lines outside the first legal stores in Ontario — has given way to a rather dismal reality: the laws of economics actually matter.
“You can’t have five stores on the same block selling the same thing,” says Nathan Mison of Edmonton-based Diplomat Consulting. “The regulatory bodies in many parts of the country are not looking at the economics of the retail industry when they approve applications. There is going to be a contraction — there has to be.”
Mison is not alone in predicting that too many stores in a small geographic area is not sustainable. While some optimists may blame the crushing effects of pandemic-driven provincial shutdowns on the cannabis retail industry, the problem runs far deeper than mandatory click-and-collect policies.
This phenomenon is not restricted to the cannabis industry, and in fact it is not even a new problem. Clusters of similar businesses rarely survive in the long term because there isn’t enough revenue to sustain everyone. One of best-known examples of this is “Curry Row” on Sixth Street in New York. The single city block was home to about 10 Indian restaurants in the 1980s, but grew to as many as 27 in the 1990s. The street was a destination on its own and attracted worldwide attention. However, today, there are only a few restaurants left on the block as a result of oversaturation, rising rents and the proliferation of South Asian eateries throughout Manhattan. In many ways, the history of Sixth Street may well be a bellwether for the cannabis retail industry.
“The issue is that the Ontario Cannabis Store is regulating the stores but not the density,” says Calgary-based Mario Toneguzzi, who tracks the retail field for a number of industry publications. “Unless stores are differentiating themselves, they have no way to stand out from the crowd. Differentiation is the key, as well as customer service and customer experience.”
This problem is being repeated in many cities as jurisdictions legalize adult-use cannabis. For example, the so-called Green Mile in Denver — a two-mile stretch of South Broadway — is a popular destination for weed aficionados. It boasts one of the highest concentrations of cannabis stores in the world, but even there some of the area’s mainstays have closed over the last few years.
“It’s just basic economics,” Toneguzzi states.
Mison draws a parallel with the alcohol industry in the province of Alberta, which moved from a public model, where all liquor was sold through provincial stores, to a private one: “We saw 1,400 liquor stores open, but several hundred of them have closed, and it’s mainly due to market saturation. The same thing is happening in the cannabis industry.”
While the legal cannabis market in Canada is only a few years old, there are plenty of historical events that illustrate what a boom and bust can look like. The first documented economic bubble, which happened in the Netherlands in the 17th century, is known as ”tulip mania.” Because of market speculation and irrational exuberance, the price of certain varieties of tulip was 10 times the annual wage of the average Dutch worker. That’s right: In 1637, a single flower was worth the equivalent of tens of thousands of dollars. Like all bubbles, it burst, leaving the economy of the Netherlands in ruins as speculators, growers and regulators were left to pick up the pieces of a market that should never have gotten so out of hand.
“This was the result of a system that completely broke down,” says Dr. Alette Fleischer, a Netherlands-based academic who is one of the world’s foremost experts on tulip mania. “Just as we see in the cannabis industry, the early players were able to make a lot of money, which attracted interest from other people who wanted to get in the game. Fairly soon, there was oversaturation, and the entire thing collapsed. The burst was caused by a combination of things. The early players were professionals, who were quickly followed by unprofessional speculators.”
Toneguzzi notes that there are two key factors to survival: niche targeting and location.
“You can have six shoe stores in a small area if one specializes in running shoes, one sells formal men’s shoes and one sells work boots. But you can’t have six Foot Lockers next to each other.”
That may be easier to do in the apparel world than the cannabis industry thanks to product homogenization. Because most provincial cannabis retailers must purchase from a central regulatory body, it is common for shops to have similar, if not identical, product lines. And it is often impossible to compete on cost, Mison emphasizes.
“It’s difficult for them to lower their prices and remain profitable,” he says.
So how can retailers stave off the cannabis equivalent of tulip mania? For starters, they can place shops in areas where there isn’t direct competition. That might not be an option for existing stores, but for companies looking to open new locations, it’s worth exploring smaller cities, rural areas and underserved parts of larger metropolitan districts. This is exactly the strategy that Matchbox Cannabis is taking as it expands.
“We won the cannabis lottery a few years ago and decided to open a store in Toronto’s Junction neighborhood,” says owner Tatyana Parkanskaia who, with her husband, had previously owned a shoe store in the area. “We knew the Junction very well and thought it would be a perfect place to be. Unfortunately, it took us almost two years to be able to open our doors because of regulatory red tape, and by the time we were able to sell, there were already three stores nearby.”
That number has since gone up to five.
While this presents a challenge for Matchbox, the company’s second and third locations are better positioned.
“We opened a store in Sault Ste. Marie, which doesn’t have that much competition. That shop is already doing well despite the fact that we opened during a provincial lockdown,” Parkanskaia says. “And our third store is on Steeles Avenue at the north end of Toronto. One of the major advantages is that we are literally a few meters away from Woodbridge in York Region, which is an affluent area that doesn’t have any stores of its own because of local regulations. So we are actually getting a lot of people crossing Steeles Avenue to purchase from us.”
Relm Cannabis is experiencing the same phenomenon in reverse. The company was one of the original seven legal stores in Ontario in April 2019, with its first shop based in the Burlington suburb, northwest of Toronto. Unlike many cannabis retailers, which focused on rapid expansion, Relm only had one store for nearly two years.
“There aren’t a lot of shops near us,” says operations director Mara Connacher. “Unlike many of the Toronto stores, we just haven’t had the same level of direct competition.”
The company opened its second store in December 2020, in Hamilton, Ontario, and is also benefiting from the lack of nearby shops, but its third location — on Toronto’s busy Bloor Street — is in the crossfire of several other retailers.
“It’s a different experience for us because our other locations are really geographically advantageous. There’s a lot of business in Toronto, of course, but it is spread out among a lot of shops,” Connacher notes.
Unfortunately, there is no single magic button that will fix the problem. As a first step, provincial licensing bodies need to start factoring in location when they review applications to open stores. Even if an applicant meets all of the relevant criteria to open a store, regulators should consider implementing policies to control density, which will ultimately help existing and new retailers avoid the crush of competition.
But even in the absence of a formal government policy, prospective retailers need to conduct due diligence to protect themselves against direct competitors, including opening in smaller towns or discovering urban locations where it is difficult for competitors to gain a foothold. And for existing retailers, it all comes down to differentiation and finding ways to stand out from nearby companies operating almost identical businesses.
Richard Berman is the CEO of VerbFactory, a marketing agency with offices in California, New York and Toronto. He has also written more than 2,000 articles for publications including the Toronto Star, the San Francisco Chronicle and Condé Nast Traveler.