The Liquor Control Board of Ontario, a.k.a. the LCBO, has been popping up on cannabis investors' radar as of late due the government of Ontario's plan to have provincially-run retail cannabis outlets. Licensed producers like Canopy Growth Corp. (TSX:WEED) (OTC:TWMJF) have wholly-owned Ontario-based subsidiaries, and shareholders want to know what this LCBO framework means for them.
Because of the fact that many other licensed producers under Health Canada's Access to Cannabis for Medical Purposes Regulations, a.k.a. ACMPR, are publicly traded entities, many marijuana investors outside of Canopy Growth Corp. are wondering what to expect as Canada nears recreational legalization in 2018.
The first 14 cities that will be home to these government-run storefronts were just announced, and besides the obvious choice of Toronto, Canada's most populated city, "the neighboring cities of Vaughan, Mississauga, and Hamilton, which are to the north, west, and south of Toronto, have also been included in the announcement."
Since these will all be run and operated by Liquor Control Board of Ontario, we wanted to educate investors on what the LCBO is, and what it means for the Ontario cannabis industry going forward.
What is the LCBO?
The LCBO is an Ontario government enterprise, and one of the world’s largest buyers and retailers of alcohol. Through over 650 retail stores, as well as cataloges, special order services and more than 210 agency stores, the LCBO currently sells nearly 24,000 products annually to consumers and licensed establishments.
What Happens with LCBO Profits?
All net income from LCBO sales goes to the province of Ontario in the form of an annual dividend. Through expansion and refreshing of the LCBO retail network, as well as improvements to operational efficiency and consumer shopping experience, the LCBO has increased its fiscal return to the government and people of Ontario each year for more than two decades. These revenues help pay for important public services including health care, education and infrastructure.
How Will Cannabis Sales Affect the LCBO as a Business?
As the LCBO forms a new subsidiary to support the retail sales of marijuana, they will obviously continue to deliver in the beverage alcohol business, ensuring that the LCBO meets their operational objectives. It is expected that as recreational cannabis sales begin, LCBO revenues will increase tremendously as a result.
Also, for those that are wondering, cannabis and alcohol will not be sold alongside each other, but rather in separate locations per the recommendations from the Government of Canada’s Task Force on Cannabis Legalization and Regulation. This new LCBO cannabis subsidiary has been named the Ontario Cannabis Retail Corporation, and we believe it to be a fitting one.
Will There be New LCBO Cannabis Jobs?
Yes, absolutely. According to the LCBO's cannabis FAQ, "all sales will be assisted via counter service, and there will be no self-service. Retail staff will follow strict requirements for age verification."
This counter-service focused model is expected to create numerous new LCBO cannabis jobs, based on the fact that the LCBO currently has around 9,300 employees (including management) for its 660 stores. Based on that ratio, we can extrapolate to assume that roughly 14 employees are required per store, so based on the initial 14 cities we can expect around 196 new hires at the launch of the program.
Since it is expected that approximately 150 government-controlled cannabis outlets will be operational by 2020, this could create around 2,100 new LCBO cannabis jobs if our assumptions are correct.
Which Companies Will Supply the LCBO with Cannabis?
Since all licensing for cannabis cultivation in Canada is overseen by Health Canada, it is the licensed cannabis producers that will be eligible. 39 out of the 69 existing licensed producers are based in Ontario, and we'd expect those to have priority over licensed producers based in British Columbia for instance.
While some of these Ontario-based licensed producers like James E. Wagner Cultivation Ltd. are privately owned, and therefore difficult to invest in, others such as Supreme Pharmaceuticals' subsidiary 7ACRES, Cronos Group's Peace Naturals Project, or Canopy Growth's Tweed are all worth a further look.
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