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Ontario Government Will Turn To Private Retailers To Sell Cannabis

The Ontario government is turning to private retailers to sell marijuana in stores come October, shifting policy dramatically less than three months before Canada legalizes recreational use.

Provincial Finance Minister Vic Fedeli and Attorney-General Caroline Mulroney are expected to make an announcement as early as next week outlining in broad strokes the province’s plan to scrap the existing public retail model and allow the private sector to own and operate bricks-and-mortar cannabis shops, according to a senior source in the Ontario government who would only speak on condition of not being named. The person added that the government will still control the wholesale and distribution of the product to the stores and manage online sales.

The move marks a seismic change in how Ontarians will shop for legal recreational cannabis come Oct. 17. It also opens the door for the companies and entrepreneurs that end up being awarded retail licences to profit from the green rush that has already been so lucrative for many investors and licensed producers.

The province’s previous Liberal government had planned to give the Liquor Control Board of Ontario (LCBO) a monopoly on the sale of recreational cannabis, with 40 physical stores set to open this year under a subsidiary of the LCBO called the Ontario Cannabis Store (OCS). Now, the Ontario system is expected to mirror the Alberta model, which will allow for privately run cannabis stores to sell marijuana with licences granted by the liquor commission.

It isn’t known yet how many retail store licences will be granted under Ontario’s new model. The government is still working out the details of how retail outlets will be able to operate, the source said. Online sales will be handled by the Ontario Cannabis Store.

The government will also begin consultations with municipalities, law-enforcement agencies and Indigenous groups over the next two months on how privatization will roll out.

Ontario Premier Doug Ford has already indicated that he was eyeing the private sector, telling reporters in late June that, “I don’t believe government should stick their nose into everything.”

The OCS said it planned to grow its roster of stores to 80 by 2019 and up to 150 by the end of 2020. (In contrast, there are hundreds of liquor stores in the province.) This spring, the OCS said it had identified four locations for its cannabis stores, including one in Toronto, but hasn’t made any announcements since then.

Silence from the OCS and Mr. Ford’s election in June had many in the cannabis industry speculating the new premier would change the province’s retail approach to involve the private sector.

“We’ve suddenly seen a lot of movement and shift, and a lot of indication toward private retail,” said Deepak Anand, vice-president of business development and government relations at consulting firm Cannabis Compliance Inc.

A spokesman for the Ontario Ministry of Finance wouldn’t comment on the details but said the province will be ready by the time marijuana is legal in October.

“The government has been working to launch a cannabis retail and distribution system to meet the federal legalization timeline of Oct. 17, 2018,” spokesman Scott Blodgett said in an e-mail. “Ontario will be ready with a system in place that meets the objectives of protecting youth and eliminating the illegal market.”

Critics of the Liberal’s approach argued that the limited storefront access initially would make it harder to entice consumers to convert to the legal market, and more difficult to thwart illicit retailers and supply.

A move to privatization could mean more money in provincial coffers, but it could also be politically risky for Mr. Ford, who courted social conservatives during the Progressive Conservative leadership race and has said he is concerned about the welfare of children with leagal marijuana on the horizon. However, the new policy would be welcomed by entrepreneurs who are clamouring to open legal marijuana shops in Canada’s most populous province.

Ontario’s debt load has exploded since the financial crisis of 2008 and under the past two Liberal administrations. Opening up the retail regime to the private sector lets the government put revenue on the books quickly through licensing fees and by reducing the upfront costs required to obtain building leases, hire and train employees and build and run stores.

In April, Nancy Kennedy was appointed president of the Ontario Cannabis Store. But last month she moved to a new role as deputy minister, Treasury Board Secretariat, under the new Ford government. David Phillips, the OCS’s vice-president of strategy and partnerships, was named interim president.

The OCS was working with hiring firm Randstad to recruit full- and part-time sales associates in 27 cities, according to job postings from late June. On LinkedIn, 29 people list their current positions as store managers with the OCS.

As of this week, the OCS was still negotiating with producers on pricing for products that would end up on store shelves, sources say. The Ontario government has been aggressive in trying to squeeze growers in order to keep retail pricing low without having to sacrifice its own margins.

In-store retail is the place where people will meet product, making it a key part of the supply chain for growers who want to control how their brand is perceived and how customers are being educated about their products.

Private retail may also be better for consumers. Depending on how many licences the government approves, increased supply could put pressure on prices. Fragmenting the retail landscape from one buyer to many buyers could also mean that more brands will get space on store shelves, as retailers look to differentiate their offerings.

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