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So, you want to open a Cannabis Retail Store?

Here’s what you need to know about how to get started on your plans to open up a cannabis retail store…

By CannDelta

ABOUT THIS SERIES

CannDelta, in partnership with the Business of Cannabis, has released a 10-article series entitled “So, you want to open a cannabis retail store?” aimed at preparing prospective cannabis retailers with the tools and resources needed to open their own cannabis retail store. This series covers everything from initial planning, estimated start-up costs, the licensing process, location selection, staff hiring, inventory management, and much more. The goal of the series is to empower prospective cannabis retailers with the knowledge and resources needed to change their mindset from “one day” to “day one”. Throughout this series, you will hear from leading voices in the industry, including current and prospective retailers, along with a multitude of ancillary service providers such as realtors, interior designers, security integrators, financial institutions, insurance brokers, and lawyers. This will be your one-stop guide to getting started. Interested in accessing all 10 articles in one place? Download the CannDelta E-Book now using the sign up link at the top of this page. A HISTORY LESSON The Canadian federal legalization of cannabis in the Fall of 2018 had many cannabis enthusiasts dreaming of opening up a legal dispensary, seeing it as a golden opportunity to start a lucrative business in an exciting new industry. Initial projections for the national cannabis market (medical and recreational) were as high as $4.3 billion dollars for the first year alone (2019). In Ontario, it seemed any citizen who could scrounge together some money was submitting an application into the initial cannabis retail lottery system and waiting hopefully for their golden ticket to arrive. And then, for most, reality sunk in. The formidable monetary expectations and requirements for early prospective cannabis retailers turned many hopefuls away. How many people could actually provide a $50,000 letter of credit within seven days? Those first-era lottery winners in Ontario who were equipped to march forward had to endure many challenges on their way towards opening up a cannabis retail store. From unfair lease agreements to funding challenges to lack of community support and breaking and entering, they faced it all. While new-era prospective retailers have their own set of challenges to overcome en route to becoming a licensed retailer (more on those later), we can, fortunately, learn from the experience of established retailers as a guide on how to get the ball rolling. In this article, we will teach you where to begin and what to expect when pursuing a cannabis retail licence.  GETTING STARTED  Whether you are a successful businessperson, a former legacy market operator, or someone with minimal relevant skills or experience, the first step is the same: do your research and make a plan. Like any worthwhile mission, it is imperative to be prepared before diving in headfirst, throwing around hard-earned cash without a clear goal in mind. There are many ways for you to begin the learning process, including understanding the licensing requirements, networking, talking with people who have done what you are trying to do, reading blogs and articles, tuning in to webinars, engaging in chat forums, and consulting with professionals (e.g., consultants, lawyers). Some key questions and considerations for you to ask and research early on include:
  • Why do I want to open a cannabis retail store in the first place?
  • What is the licensing process to open a cannabis retail store in my province?
  • What professionals and experts will I need to hire to help me?
  • How much funding do I have currently, and how much will I need?
  • Who will I partner with? Do I even need a partner?
  • What type of company structure will I have (e.g., sole proprietor or corporation)?
  • How do I register a company?
  • Where should I open my store? Does that municipality permit cannabis retailers?
  • What is a reasonable timeline for making this happen?
Doing your homework to answer these questions will give you a great start in understanding all that goes into opening a successful cannabis retail store. You’ll notice that questions like “What will I name my store?”, “How many employees will I need?”, “How much money will I make?” were not listed. While important, these questions are best left for when you have answered the fundamental questions that are most critical for getting your licence application submitted as soon as possible. SHOW ME THE MONEY Securing enough capital to open a cannabis retail store can be a significant challenge, and can determining how much start-up capital you may need. As part of your licensing application, you must demonstrate that you have access to sufficient funds to open a retail store, including for the initial inventory purchase (more on that later). Governing bodies such as the Alcohol and Gaming Commission of Ontario (AGCO) offer little guidance on what they expect for proof of funding, but conservative estimates are in the range of $100,000 to $250,000 (CAD). This is one great reason to consider partnering up so you can dilute your individual financial obligations. Proof of funding can come in a variety of forms, including personal savings, securities held against owned real estate, investors (personal connections and private), and any other assets which can be easily liquidated such as stocks and bonds. So how much will you need? This largely depends on:
  • Your store size: bigger spaces come with higher lease payments, overhead, inventory, and staffing requirements.
  • Your store location: being in a crowded marketplace will increase marketing and advertising costs and could compromise your margins by forcing you into fierce price competition with neighbouring retailers.
  • Your product distribution: your choice of product offering (e.g. premium versus economy flower) will have a substantial impact on your initial and ongoing inventory costs. Plan accordingly.
  • Your store environment: designing a modern, appealing, and inviting retail store that provides a great customer experience is always the goal but can be expensive to achieve.
  • Your supporters: hiring professionals such as consultants, lawyers, interior designers, and architects is important for getting your business up and running but can be costly. 
START-UP AND ONGOING COSTS We have scoured the internet, spoken with trusted professionals, and interviewed numerous current cannabis retailers, in an attempt to provide the most accurate and up-to-date start-up cost information as possible. Featured below is a summary of the major start-up and ongoing costs for opening and operating a cannabis retail store: from licensing fees to inventory costs, we have you covered! Figure 1. Estimated cannabis retail start-up costs ($CAD). 1Ontario. Licensing Fees In Ontario, there are several AGCO mandated fees required when you apply for a Retail Operator Licence (ROL), Retail Store Authorization (RSA), and Retail Manager Licence (RML), along with renewal fees:
  • ROL | $6,000 for 2-year term | $4,000 renewal fee for new 2-year term
  • RSA | $4,000 for 2-year term | $3,500 renewal fee for new 2-year term
  • RML | $750 for 2-year term | $500 renewal fee for new 2-year term
These fees are non-refundable, non-taxed, and must be paid in order to successfully submit your licence or authorization application using the iAGCO online portal. Real Estate Negotiating a favourable lease agreement is a major early obstacle for cannabis retailers, who are routinely forced into paying premiums by landlords who are skeptical of the longevity and profitability of the cannabis market.  It is critical to work with professionals such as lawyers, consultants, and real estate agents to ensure favourable lease terms that protect your short and long-term interests are secured. In article #4 of this series, we more broadly explore how you can secure a great location and lease agreement. Construction and Renovation Construction and renovation constitute a major chunk of your start-up costs, with Ontario retailers citing a range of $75-400k spent on building out their retail space. The cost will be highly dependent on the size, location, and existing condition of your store. Finding a retail space that is in great condition and requires minimal tear-down will go a long way in saving precious dollars for other aspects of your start-up. In article #5 of this series, we dive deep into best practices for navigating the construction and renovation phase of your start-up, including insight from industry experts. Interior Design Much like construction and renovations, the cost of designing your retail store will be largely dependent on its size and location. Your style preference will also have a major impact on price: will you keep it simple, or extravagant? As all Ontario cannabis retailers have access to the same inventory (i.e. are selling the same product), the layout and ‘feel’ of your store is one of the few ways in which you can stand-out in a crowded market. Retailers we interviewed suggested keeping it simpler in the early phases, and once revenue starts rolling in, then make updates to the store. We cover interior design in more depth in article #5 of this series. Professional Services Whether you are an experienced businessperson, or new to the game, you will likely require additional help to get your retail store up and running. Contracting professionals is not only a great way to save precious time, it also strengthens the foundation of your new business, and will endear you with potential investors. Examples of professional contractors you ought to consider hiring when planning to open up a retail store include:
  • Lawyers: for everything from company registration, licensing support, and employee contracts. Lawyers also play a crucial role of developing business policy, which can include employee hiring, social media and acceptable behavior.
  • Architects: you should look for architects familiar with cannabis retail that appreciate important considerations like inventory storage space and vestibule age-gating areas.
  • Interior Designers: the look and feel of your retail store will go a long way in establishing your brand a solid customer base; hire interior designers with cannabis retail experience.
  • Consultants: while there are numerous consulting firms who specialize in cannabis retail licensing, you should seek out those who support multiple facets of the start-up process as possible (e.g., developing business plans, location selection, floor layout and security design, licensing, SOPs, and more) in order to maximize value.
When considering a contracted professional to work with, make sure to do your homework, talk to people who have worked with them, and set up a free consultation to see if they are a good fit for you; professionally and financially speaking.  While the bulk of professional service costs will come in the start-up phase, it is highly recommended that you retain the services of select contractors to ensure your store continues to operate smoothly and maintains compliance as regulatory frameworks change and adapt. Security Installation Developing a robust security system is not only imperative for the safety of your customers, employees and assets but is also a critical requirement of the licensing process. Regardless of which province you are in, all regulating bodies have strict and concise guidelines with respect to what is required for your security system. Some major features include having a surveillance system that can capture video 24/7, along with secure control measures at all entry and exit access points. Working with consultancies with cannabis retail security design experience is a great way to ensure that your security system will be secure and compliant in a cost-effective manner. Article #6 is entirely devoted to cannabis retail security, featuring valuable insight from trusted security vendors in the cannabis space. Initial Inventory Purchase The last significant cost of the start-up phase is making your first inventory purchase. In Ontario, you will be allowed to do so once you have been granted a conditional RSA licence and have set-up your wholesale purchasing contract with the Ontario Cannabis Store (OCS). The OCS allows for an initial order quantity of 100 kg of dried cannabis equivalency, and subsequent weekly orders of up to 25 kg. Based on current wholesale prices, you could spend anywhere between $50,000 to $750,000 on your first inventory purchase. Numerous factors are important to consider when filling out your first order:
  • Your cash situation: you’ve likely depleted much of your start-up fund by this stage, making it difficult to afford the full 100 kg allotment. Instead, stock up on products that are likely to sell quickly, so you can quickly recapture the funds needed to obtain the full scope of cannabis products available.
  • Size of secure storage: having a sufficiently large storage space gives you the flexibility of stocking up on all cannabis product types, including bulky product formats, like beverages.
  • Your customer base: knowing who your typical customer is the key to stocking your store with the right products. As an example, stores with a primarily youthful demographic should consider stocking up on cheaper, high-THC flower and pre-rolls.
In article #9 of this series, we will cover the intricacies of inventory ordering and management in more depth. ONGOING COSTS While the focus of this article (and series) is on getting ready to open up a successful cannabis retail store, we want to highlight some of the expected ongoing operational costs so you can better prepare financially. Figure 2. Estimated cannabis retail ongoing costs ($CAD). Many of the start-up cost components will also be part of your ongoing costs, such as real estate, marketing and advertising, professional services, and of course, inventory. There are a few major new costs that will be a part of your ongoing operation, including:
  • Employee salaries: largely dependent on the size of your retail store. You will want to offer competitive salaries, especially for managers, to attract and retain top talent.
  • Insurance: it is critical that all aspects of your retail operation are protected, from property and product to customer and employee liability, make sure you are covered. (As of November 2020, in the province of Ontario, the Ontario Cannabis Store has lowered the commercial general liability insurance minimum from 10 million five million dollars, which is great news for cannabis retailers.)
  • Financial Services: there are a growing number of financial banking institutions willing to take on the accounts of cannabis retailers. There will be holding, and other related fees associated with your bank accounts, so do your due diligence before signing on the dotted line.
  • Professional Services: most of the professional service costs will come during the start-up, however, it is recommended that you retain ongoing support for things like compliance and legal counsel.
  • Service Provider Subscriptions: include ancillary services such as your point-of-sale provider, IT and security support, internet and cable, and ongoing operational maintenance.
We will cover much of these important aspects in greater detail throughout this series. Be sure to check out the next article in the series: #2 Company Structure and Business Plan. BOTTOM LINE Opening up a cannabis retail store is an incredible opportunity for both experienced and new business owners to enter into a brand new and exciting sector of the economy. While the financial opportunity for running a cannabis retail store can be highly lucrative, this can only be achieved through proper planning and execution. No matter how daunting the challenge of starting this journey may seem, there are essential resources available to help you get started. Throughout this series, we hope to empower prospective cannabis retailers with the knowledge and resources needed to change their mindset from “one day” to “day one”. WORDS OF WISDOM Featured below is advice from current Ontario retailers who have been there and done that. You’ll hear more from these retailers, along with others in the industry throughout this series. What advice do you wish you had before starting up your retail store? “Decide whether you want to establish a relationship with an already established partner or not… we have done both and there are advantages and disadvantages to both.” “The biggest piece advice I wish I had before starting the process was how you can plan everything to a tea and think you crossed all your T and dotted all the I, but you have to be flexible to change any aspect of your original plan at a moment’s notice in order to follow the regulations set by the government which are many but also seem to be rather vague”  “To partner with a local brand, as getting a store up and running, and achieving operational excellence thereafter is extremely difficult to do in a new and evolving industry without an experienced team to help you.”  “Don’t take anything you’re told at face value – this is a brand-new industry, so the vast majority of the people involved don’t really know what they’re doing either. Decide on a concept and philosophy early and stick with it” What advice would you give prospective retailers looking to break into the Ontario market?  “Location, location, location… check with AGCO list of stores to see where your competitors are located and be as far as you can be from them…”  “Be patient, between AGCO, the province, and your municipality, you are going to run into a frustrating amount of red tape, and nothing is going to move quickly.”  “Buckle up.”  “Do a ton of research and check references for anyone you’re thinking about doing business with. There are a lot of really good people in this industry as well but do your homework.” CANNDELTA IS HERE TO HELP Prospective and current cannabis retailers needing support should reach out to CannDelta for a free consultation. CannDelta is a Toronto-based regulatory and scientific cannabis consulting firm that has helped navigate dozens of cannabis retailers across Canada through the licensing process. We can be reached at info@canndelta.com or or toll free at 1 (877) 274-6777

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