A Spiritleaf concept store prototype.

Welcome to cannabis country.

A burgeoning new retail industry is poised to quickly scale in Canada, where the government legalized cannabis for recreational use, allowing individuals to purchase online from a federally regulated producer of marijuana starting on Oct. 17. While the Canadian Parliament in 2017 passed the bill legalizing the sale of recreational cannabis, much of the regulation, including retail sales, has been left to the provinces.

Stores have begun popping up in Alberta and Saskatchewan, two of the first provinces to legalize brick-and-mortar cannabis locations. Ontario’s new government green-lighted online cannabis sales in October, with physical retail expected to begin in April. The substance has been approved for medical purposes and distributed through dispensaries in Canada since 2001.

Retail players expect hundreds of stores to sprout over the next year, and forecast thousands eventually.

Tom Dyck, chief executive officer of Mihi, one of Ontario’s newest cannabis retail banners, said retail real estate owners are benefiting at a time when “online has taken up a chunk of retail sales and freed up space on streets and in shopping centers. There’s been a bit of a gold rush with cannabis retailers getting into bidding wars for prime space.”

Dyck said that with lots of potential market entrants, both large and small, looking to quickly pick up the most visible and commercially viable sites in the provinces, “there are often four or more bidders for a property, which is driving leasing costs up to double normal rates at some locations. More sophisticated landlords, though, aren’t pushing to that level of excess and are putting a greater emphasis on the store concept, quality of management, and financial position of market entrants.”

“We’ve seen an incredible amount of activity from everything from mom-and-pop cannabis retailers to multimillion dollar publicly traded companies,” said Brandon Gorman, vice president of retail services at Cushman & Wakefield in Toronto. “We’re probably getting 100 inquiries per day.”

While no leases have been signed with a cannabis retailer on upscale Bloor Street, Gorman believes it’s just a matter of time. “Cannabis firms are offering 150 percent to 200 percent above market rents,” he said. “A space on Queen Street was renting for $60 per square foot and we got an offer for $115 per square foot from a cannabis company. I’ve heard of bidding wars on Queen Street where there’s a conditional deal with a traditional retailer and then a cannabis retailer comes in and offers 50 percent more.

“It’s been a bit of a circus in the last month or so,” Gorman continued. “With each new regulation that the government releases, cannabis companies have been very reactive. The cannabis guys would love to go to shopping centers, but I don’t think the institutional mall investors are ready for that. Whether it’s three to five years from now, cannabis stores at shopping centers will be commonplace.”

Cannabis sales in Colorado — the first U.S. state, along with Washington, to approve recreational marijuana sales, in 2012 — are estimated to reach $1.6 billion in 2018, according to the Colorado Department of Revenue. Canada’s Parliamentary Budget Officer projected 2018 marijuana sales — both legal and illegal — of $4.2 billion to $6.2 billion. If Canada’s recreational marijuana industry follows Colorado’s trajectory, experts said Canada could see sales of more than $10 billion annually in a few years. Research firm McAlinden Partners said $1.23 billion was invested in the sector in the first five weeks of 2018, more than 600 percent more than the $178 million invested in the first five weeks of 2017. All these and subsequent ones referencing Canada are in Canadian dollars.

Both the federal and provincial governments will benefit from the legalization, with the federal government charging a tax of 10 percent or $1 a gram on every sale, whichever is higher while the provinces will charge sales tax.

In Ontario, there’s financial incentive for cities that opt to legalize marijuana for recreational use. If the province’s portion of the revenue from the federal tax on recreational cannabis exceeds $100 million for the first two years of legalization, the government will provide municipalities with 50 percent of the surplus.

But not all cities are on board. Ottawa, which could get as much as $1 million a year from the province just allowing cannabis retailers to open stores, is divided on the issue. The city council on Dec. 13 will consider an earlier report and invite public comments on whether or not to permit cannabis retail stores in Ottawa.

Inner Spirit Holdings’ Spiritleaf lifestyle stores, upscale-looking units with weathered wood fixtures and seating areas for sampling products, have opened locations in Brooks, St. Albert and Lethbridge, Alberta, and Moosejaw, Saskatchewan. The company has 23 other municipally approved locations in Alberta in various stages of construction and subject to license approvals, along with 17 additional conditionally secured locations.

“We’ll open 100 stores over the next year, both corporate and franchise locations, and 2,000 to 3,000 stores across the country in due course,” said Darren Bondar, president and ceo of Inner Spirit.

Mihi plans to open hundreds of stores across Canada. 

He noted today’s cannabis consumers don’t fit the hippie stereotype of stoner comedy duo Cheech and Chong in the Seventies, who happen to hail from Vancouver. “Watching consumer trends, it’s not who you’d expect,” Bondar said. “We’re appealing to a wide range of customers of all ages, from habitual cannabis users to new users to soccer moms and soccer dads.

“We’re already actively securing real estate in Ontario,” Bondar added. “I don’t think we want to be in shopping centers. It depends on what’s available. There’s a lot of restrictions in terms of locating near schools and places of worship. We’ve done a bit of everything. We want to be where it’s convenient for people to pull up in a car. We’ve done some high streets with high pedestrian counts for branding. We’re trying to change the perception of cannabis — it doesn’t have to be sold at a dingy dispensary.”

In addition to cannabis, Spiritleaf offers accessories such as rolling papers and trays, and a locally sourced clothing line. “It’s made out of bamboo,” Bondar said. “It’s all made in Canada and very comfortable.”

Retailers such as Mihi, which means “for me’ in Latin, are catering to consumers who are increasingly educated, female and around 37 years old with bright, modern, comfortable stores that would look at home in any upscale shopping center. Light wood fixtures and seating areas provide spaces for discovery, learning and conversations with “bud masters,” who advise on the fine points of products.

Mihi is backed by a $25 million investment from BlackShire Capital Corp., a principal investor and asset manager in the global cannabis sector. With the passage of Bill 36, which outlines the retail framework in Ontario, Mihi is pursuing  a province-wide retail network that could support 1,200 stores, according to Mihi’s Dyck, adding that stores averaging 2,000 square feet will ideally be located close to “any space where consumers do their weekly shopping,” he said. “There’s a purchase pattern of 18 days, so every second week they’re buying.

“With close to 15 million people living in Ontario, it could easily support that many stores,” Dyck said. *Most of the math talks about people who already consume. With the aging population, people find it helps them sleep better and helps with aches and pains and arthritis. Cannabis has been under prohibition and demonized for 100 years. It’s definitely misunderstood. I’m surprised at how quickly people are being more open-minded and objective. It’s an industry that’s rapidly evolving and changing daily, from a regulatory landscape and consumer perspective.”

In two to three years, women’s share of consumption in the market will grow from one-quarter to one-third, Dyck predicted, adding, “When you look at broader professionals, cannabis users are twice as likely to have post-secondary education. They’re self-starting, purpose-driven and wellness-oriented. When the opportunity came to start to shape industry from a retail experience, that’s where we got interested and excited. We spent $1 million to understand cannabis consumers.”

While there’s a lot of upside to the nascent cannabis market, there are also challenges. “How do you drive out the black market, manage reduced access for minors? And for those who choose to use, how do you ensure the product is ethically produced and free of all contaminants?,” Dyck said. “It’s really fascinating, I spent the better part of a decade hounding my kids about the evils of smoking weed. When you compare weed and alcohol, there’s no question that cannabis should have been legalized and not alcohol. Well over 15,000 Canadians will die of alcohol abuse while there hasn’t been a single cannabis-related death.

“Our research is telling us the cannabis consumer is focused on their own wellness and life experiences,” Dyck asserted. “They’ve been stigmatized, criminalized and marginalized for an activity that harms no one.” In an effort to legitimize cannabis, it’s “really important that the people in store are more knowledgeable about the industry than consumers. This is a customer who already knows a fair amount about the product. In many ways, cannabis has parallels to wine tasting. There’s a real epicurean aspect.”

The Canadian government is taking a cautious approach to legalizing cannabis. “What’s legal now is the flower you smoke and oil for vaping,” Dyck said. “By the end of 2019, edibles and beverage infused with cannabis will be legal. In many ways, the government feels a bigger responsibility as one of the first G-7 nations to legalize marijuana. The same trends driving this change in Canada are driving it everywhere else. We want to make sure we can avoid as many accidents as possible.”