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Will a store on 'Canada's Rodeo Drive’ help build the ‘Whole Foods of cannabis’?

(Yahoo Finance Canada)
(Yahoo Finance Canada)

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Trevor Fencott seems relaxed standing next to the locked door of his store on Toronto’s ritzy Mink Mile, where well-heeled shoppers file in and out of the nearby Hermes and Prada boutiques.

The chief executive of the Edmonton-based cannabis retail chain Fire & Flower Holdings Corp. (FAF.V) has been paying rent at this pricey location for months now, unable to open for business until he can secure a license from the Ontario government.

For now, Fencott is content to play the waiting game and eat the cost of the lofty lease to secure a storefront that cements cannabis at the highest level of Canadian retail.

“You have to accept that level of risk,” Fencott told Yahoo Finance Canada, standing in front of his store’s covered front windows.

A passerby asks him when the store will open. Fencott is aiming for a December launch, though delays and uncertainty are often the norm in the cannabis industry.

Cushman & Wakefield ranked Bloor Street number six on its 2018 list of most expensive rents per square foot in North America. The real estate giant found space here goes for US$229 per square foot annually. Fire & Flower’s unopened multistory location at 95 Bloor Street West is smack in the middle of poshest stretch, sharing a block with Hugo Boss, luxury leather brand MCM, and Swiss watch-maker Victorinox.

“Our investors and the capital that we have raised are very patient. And it’s risk capital. Sometimes you are going to win. Sometimes you are going to lose,” Fencott said. “You have to believe that on some time horizon this is going to open up.”

By “open up” he means Ontario’s cannabis regulations. Fire & Flower currently operates 17 locations, mainly clustered in Alberta and Saskatchewan, where the hurdles to open up stores are proving less challenging. The company projects it will operate a network of 135 locations by the end of 2021. Fencott expects Ontario will be Canada’s most significant market, given its large population.

AltaCorp Capital analyst David Kideckel is confident the company can meet its rapid expansion plans. He also sees Fire & Flower achieving a “significant competitive advantage” though its Hifyre Digital Retail and Analytics Platform, a consumer behaviour and trends tool the company acquired last July.

“We continue to remain positive over Fire & Flower’s outlook and stay confident in their ability to successfully execute their store roll-out strategy,” Kideckel wrote in a note to clients in late May.

“Fire & Flower’s proprietary digital platform continues to be a key differentiator for the company providing key customer data, meaningful retail market intelligence, in addition to a significant revenue opportunity through data monetization.”

AltaCorp initiated coverage on the Fire & Flower last month. Kideckel maintains a “speculative buy” rating, and a one-year target price of $2.80 on TSX Venture-listed shares.

‘You’ve got to have these great locations’

Fearing weak supply, Ontario Premier Doug Ford’s government moved to limit the number of brick-and-mortar locations to 25 lottery-awarded licensed shops last December, after scraping his predecessors plan for province-run stores. That cap is set to remain in effect until Dec. 13, 2019, when Ontario Regulation 468/18 is expected to be amended.

The roll out of cannabis stores across the province as been painfully slow, with many operators who won licenses in the lottery shouldering steep fines for not meeting the April 1 deadline to open up shop.

Brad Poulos, instructor of the Business of Cannabis course at Ryerson University's Ted Rogers School of Management, commends Fire & Flower for taking a long-term view in what promises to be a key market.

“This is Canada’s equivalent of Rodeo Drive,” he told Yahoo Finance Canada. “If you are going to be one of the major players, one of the top three or four in Canada, which I am pretty sure Fire & Flower aspires to be, then you’ve got to have these great locations.”

Poulos is among the industry observers who believe consumers will forge stronger ties to where they buy their cannabis, rather than specific brands, due to Health Canada’s limits on promotion, advertising, and packaging. He said stores are by-and-large going to have a similar product mix early on. Those that stand out, he predicts, will do so by offering superior service.

‘The Whole Foods of cannabis’

Fire & Flower’s expensive decision to loiter on Bloor Street was born in part out of a desire to mimic another chain Mink Mile shoppers are probably familiar with.

“We want to be like the Whole Foods of cannabis. We want to have that deep relationship with our customer,” Fencott said, explaining the importance of a curated, premium in-store experience.

Borrowing a page from Whole Foods, Fencott sees the Bloor Street location offering perks like private shopping to bring in upscale customers who may not be familiar with the ins-and-outs of modern cannabis.

Education is expected to be a key focus for a long time. Firstly on the dried flower, gel capsules and pre-rolls on the market today. Then on edibles, drinks, vapes and other creations set to be legal for sale in October 2019.

Anticipating new products at the store-level, Fire & Flower’s retail spaces are designed to adapt.

“The store design is a series of modular leaves. The last leaf is designed to come out and be replaced with a cooler. We can do that change in a weekend,” Fencott said.

With the majority of brick-and-mortar retail under fire from online shopping for the foreseeable future, Poulos is convinced cannabis is the most exciting development the segment has seen in years.

Critical of provinces like Ontario awarding licenses by lottery to inexperienced operators, Poulos is encouraged by the scale and experience of large retail-focused players like Fire & Flower, as well as the retail arms of the big licensed producers.

“You’ve got non-retailers operating this incredibly complex business,” he said. “Thank goodness for companies like Fire & Flower that are jumping in and helping out.”

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