Making retail lemonade out of Ontario lottery lemons

January 18, 2019

Rule intended to prohibit a change in control of the applicant or licensee

I believe in good government. I also believe the Ontario government and its many agencies and commissions are led by smart professionals, both elected and in the public service, who care deeply about what they do and want to do great things for Ontarians.

So when the provincial government came to the precipice of opening the window wide for cannabis retail applications opting instead in December to shut down the number of bids amid supply/feasibility challenges, the lottery concept for retail applications seemed like a really good idea and fair way to manage in a stepped approach. Even though the Alcohol and Gaming Commission of Ontario (AGCO)—the regulator for private cannabis retail in Ontario—was clear that applicants should be prepared to have stores operating by Apr. 1, 2019, some interested parties seem to have missed the purpose in the guidance given.

As proof, just consider recent news articles outlining the bidding wars for these so-called golden tickets, whereby a winner is prepared to license its application to a capable operator.

Sidestepping the rules?

It’s a curious approach given that the AGCO clearly outlined the rules in this respect and published an FAQ on its website wherein a question regarding changing applicant type, ownership and/or corporate structure during the lottery period elicited the following response: “No. Any change in control of the applicant or licensee by any method or process during the lottery period is not permitted.” The question further addressed whether or not an applicant can enter into a franchise agreement, to which the response added: “The rule is intended to prohibit a change in control of the applicant or licensee resulting from a change in applicant type, change of ownership, change in corporate structure, the entry into a franchise agreement or any other agreement, court appointment of a receiver, or any other circumstance.”

Wait, what? Lottery winners can’t enter into any agreement that would have the effect of a change of control? So, on what basis are these auctions occurring?

It could very well be that much financial and strategic muscle will be flexed, resulting in handshake agreements between lottery winners and their partners only to be upended. And rightly so, given the spirit of the lottery rules and despite the legal manoeuvrings of the parties involved. Said more bluntly, a significant waste of time and money could occur producing no retail licence and, therefore, far fewer stores open in a very tight timeline.

At this point, while some critics are rightly suggesting the application criteria could have been more robust, others might argue that, perhaps, applicants should have been more forthcoming about their interests. Either way, it’s time to move forward.

Private retailers should take the reins

The expectation is the AGCO will ensure only serious operators get licences. The lottery will produce a number of stores by Apr. 1 and while imperfect, this represents progress for consumers and, if those selected operators truly understand their responsibilities, the cannabis industry as a whole.

That being said, it’s time for the Ontario government to allow the private sector to take it from here. The government would be well-advised to re-open the application window for organized retailers so that they can begin the rolling out stores on their own terms.

There is no need for government to chaperone private enterprise in this space. Entrepreneurs and organized capital are doing their homework on cannabis supply. Health Canada is producing a monthly report on supply as are many of Canada’s investment banks.

There is sufficient data available to guide business decision-making. Smart businesses will time the opening of their stores to when supply comes online. Surely, no business owners would roll out 75 stores at once and risk having empty shelves, but if they did, that would be their problem, not the government’s or the AGCO’s.

Ontario’s Progressive Conservative government did the right thing to enable private retail of cannabis. It need not now shelter entrepreneurs, organized retailers and their investors from the opportunity and the risks ahead. That was the old model—cannabis retail run by the province.

It’s time—right now—for the government to allow business people to make decisions on the leases they signed and the investments they need to make, to be successful over the long term. The last-minute play change has already cost smart organized businesses millions of dollars and, every week, the delay on what the next steps are adds to that hefty tally.

If government gets the train back on the private track now, it will be making retail lemonade out of these lottery lemons.

The GrowthOp link