Canadians hate buying cannabis online. Online adult-use cannabis sales drastically fell during Canada’s first year of cannabis legalization; online’s percent of total adult-use sales fell from over 40% in October 2018 to less than 6% in September 20191. Online’s decline seems especially pronounced considering how limited the brick and mortar retail channel still is. In July 2019, the average distance between consumers and a cannabis retailer in Ontario was 43km2. As the brick and mortar retail channel becomes more robust, expect online’s percent of total sales to drop even further.
With online’s decline, brick and mortar retailers will be the primary growth drivers for the cannabis industry. Indeed, in April 2019, Level5 published our belief that industry growth would be driven by cannabis retailers and branded organizations. We also recently spoke with Andrew Wilder, the Co-Lead of the Cannabis Law Group at Torkin Manes, about the retail landscape in Ontario. The Cannabis Law Group had recently hosted a cannabis retail conference with industry experts [click here to see presentations from that event], and Andrew relayed that the industry experts were excited about the retail opportunity in Ontario:
“All of the speakers were bullish on cannabis retail, especially the opportunity in Ontario now that the lottery has ended. The general consensus of the experts was that given the size of Ontario’s population and the limited number of stores that are presently legally operating, Ontario could easily accommodate north of 1,000 stores.”
Ontario will be on every retailer’s radar as the province’s retail channel is poised for rapid expansion. The OCS recently abolished the much-maligned lottery system and introduced a new application system that will increase the number of retail outlets to better meet consumer demand. Ontario will be a key growth catalyst for the Canadian market. With the scheduled increase of 20 stores a month starting in April, cannabis retail competition will rise. Ultimately, the brands that best meet three key success factors (KSFs) will be the ones that become market leaders and establish long term sustainable growth.
“Ontario will be a key growth catalyst for the Canadian market. With the scheduled increase of 20 stores a month starting in April, cannabis retail competition will rise. Ultimately, the brands that best meet three key success factors (KSFs) will be the ones that become market leaders and establish long term sustainable growth.”
1. Build Brand Recognition
Due to regulatory constraints on marketing and traditional branding, retailers’ awareness levels among consumers may be predicated on their ability to responsibly scale. While brands such as Tokyo Smoke, Canna Cabana, and One Plant have multiple locations in Ontario3, no brand has established a large retail network in the province. That will begin to change this spring. By 2021, we expect the retail market in Ontario to be quite mature. Many brands are looking to grow in Ontario and establish market leadership. For example:
- Friendly Stranger, a legacy Ontario head shop, has granted trademark licenses for the use of its brand to six Ontario license holders; additionally, Friendly Stranger intends to apply for licenses (under its Friendly Stranger and Happy Dayz brands4).
- Through franchise arrangements with current retail license holders, Tokyo Smoke will increase its brand’s store count to 10; Tweed will also be looking to expand its store count.
- Fire & Flower CEO Trevor Fencott didn’t mince his words regarding the company’s Ontario growth plans: “We’re allowed, I believe, to have 10 for the first cohort and we will have 10 . . .You’re allowed to [have] 30 by December of 2020 . . . we’re going to try to hit every one of those milestones”.
The brands with a large network of stores will have an increased ability to grow consumer awareness and earn brand ambassadors. Much like retail in other categories, consumers benefit from the convenience of a consistent experience at their preferred brand, whether it’s near their home, their workplace, or anywhere in between. Look for large retailers to continue to secure partnerships and franchise arrangements with license holders to facilitate growth, increase brand recognition, and drive penetration.
2. Create a Purposeful and Consistently Executed Customer Experience (CX)
To become market leaders, brands will need to nail the fundamentals of retail. The legal cannabis market is still in its infancy, and consumers have had limited exposure to different retail brands. As such, consumer loyalty has yet to be galvanized. The brands who establish a consistent experience across their stores and who mitigate poor consumer experiences will emerge as market leaders. Level5 has found that pain points—negative brand experiences—are much more impactful on consumer purchase intent and loyalty than positive experiences. Moreover, 42% of customers stop shopping with a brand after two bad experiences5. Cannabis retailers should take heed and ensure they address pain points to deliver a stronger and more consistent CX.
Besides eliminating pain points, winning cannabis retailers will build their competitive advantage by listening to their customers. With relatively unknown consumer preferences, there is an opportunity for retailers to leverage data and become differentiated through their customer-centricity. In this respect, differentiation does not necessarily mean that retailers need to re-create the wheel. Rather, differentiation can be established by identifying consumer needs that are not being met and filling the gap, or by better identifying and delivering on key moments of truth (positive experiences that have the largest impact on consumer purchase decision and loyalty).
Data can be used to fully realize budtenders’ potential. Having the opportunity to ask questions to budtenders and gain more information about novel products has facilitated consumers’ preference for retail over online. Because the legal cannabis market is still nascent, many consumers may lack information and familiarity with the various product offerings. Better understanding how consumers are using cannabis, or what questions they have, will help budtenders recommend the right product for their customers and be effective point-of-purchase influencers. By engaging and educating consumers, budtenders will increase consumers’ loyalty and the shop’s CX.
“With relatively unknown consumer preferences, there is an opportunity for retailers to leverage data and become differentiated through their customer-centricity.”
3. Align Merchandising to Your Customers’ Wants and Needs
While the US market can directionally indicate which product types will be popular, overall consumer preferences—especially with 2.0 products—are relatively unknown. Large retailers should use data to inform their product offerings, with an eye to local taste. Vapes represented 79% of California’s concentrate sales in the first half of 2018 but only 43% of concentrate sales in Colorado6. Clearly, consumers in different markets can have distinct tastes; it is essential that retailers know their customers and carry inventory that aligns with their preferences. The most successful retailers will adopt an agile mentality. Retailers should initially leverage data from other legal markets and third party sources to hypothesize which product offerings will be the most successful but remain nimble, and validate or adjust based on current purchasing data and consumer feedback.
Cannabis retail competition will increase. Retailers are gaining increased attention from investors and corporate partners, and regulations are allowing for more entrants. The retailers who meet these KSFs will be the ones who establish long-term sustainable growth.
These recommendations all assert the importance of core retail—or, for that matter, business—fundamentals: know your customers and their drivers and align your organization to consistently deliver on a clear brand promise that meets those customers’ wants and needs.