BRINGING CONVENIENCE TO CANNABIS

Perspective

August 20, 2020

4 min read

Vending machine Girl
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From initial annual sales forecasts of $5B to current projections of less than half that, the high hopes for legalized cannabis in Canada have not materialized. The answer lies in the convenience channel.

When developing the business strategy for a new category launch, there are three fundamental considerations that need to be weighed to ensure success. First, you need an understanding of the target consumer—what motivates them, and their need states and pain points. Second, you need to understand the moment and mindset your target requires to consider engaging in the category. The third consideration is the channel strategy: This ensures your category is available in a channel that will give you the greatest odds of connecting with your target when they are ready to engage.

In looking at the cannabis category, we believe a massive opportunity was overlooked in the convenience channel.

Currently, despite all the efforts to legalize cannabis in Canada, our two largest provinces continue to suffer a massive shortfall in stores. This is putting a serious dent in Ottawa’s taxable income. Ontario alone needs 1,400 stores to meet provincial demand, using the metric of one-store-per-10,000- customers—a ratio established in Alberta and Colorado. Alberta, with over 5.5 million residents, has over 500 outlets, while Colorado, with over 4 million people, also has over 500 outlets. Ontario, with over 14 million people, has just topped 100 stores. Without closing this distribution gap, the province can’t hope to reap the tax benefits of its investment in legalization.

On a positive, licensed producers have solved supply issues and the government is handing out more licenses. But now COVID-19 has reared its head. Access to capital, commercial real estate, and construction has slowed down due to the pandemic, impacting all the necessary steps to open a retail location. Employee health and safety are a major concern, increasing operational costs for stores once open. At the same time, consumer traffic has been reduced by 50 percent as retailers respect distancing laws, impacting the sales opportunity. The economic reality is one that won’t work for the stand-alone retailer.

The moral of the story:

Establishing 1,400 brick-and-mortar locations quickly—during a pandemic—is not feasible. However, the taxable income, during a time of historically high debt, is necessary.

There is a solution:

The convenience channel. Ontario is already committed to bringing beer and wine to this channel—and Quebec has been this way for over 40 years. The only remaining hurdle is government legislation to include convenience as an additional channel and access point. Opponents have argued that convenience brings with it concerns around security—underage access, theft, and operator safety.

Cannabis-stocked vending machines address all of these concerns.   

Vending machines can support quick, cost-effective retail expansion. Through a carefully planned real-estate strategy, a province-wide fleet of machines could be serving consumers and driving sales in a fraction of the time. 

 

Vending machines offer advanced functionality and can be made highly secure (think ATMs). They can be easily branded. They can offer curated assortments based on local market preferences, along with educational information on strains, usage, and safety. They also provide additional revenue-generating levers like the ability to sell feature space to LPs for new product launches.

There are several ways ownership and operation could play out. In Ontario, the online Ontario Cannabis Store (OCS) could own the network in partnership with brands in the convenience channel. Or a new company could be created specifically to deploy, fulfill and replenish the machines. Or licensed cannabis producers—now legally prohibited from operating retail stores—could brand and service the machines, with provincial governments maintaining oversight while transferring their costs.

When dealing with adult-targeted categories, age-gating is always a concern. Thanks to modern technology, this can be addressed with a few pre-purchase steps: Register online (using government ID) to create an account. Once in the system, you can browse products, complete a purchase, and pick it up from the nearest vending machine. Or, as long as you’re registered online, go direct to the machine and buy on the spot—facial recognition software is used to authorize the purchase.

It’s a win-win-win-win:

Consumers can shop far more conveniently, accessing a wider variety of products, previewing them in advance, and making purchases as easily as a walk to the corner store.

Governments continue to control and legislate the supply chain while transferring costs to LPs.

LPs could gain a retail foothold they previously only dreamed of, driving sales and brand loyalty.

Convenience has not been a hallmark of cannabis—and it needs to be for the sector to flourish and fulfill its revenue and tax potential. Consumers want to be able to buy it easily. Locally. The same day. They want choice. They want competitive pricing.

A vending-machine strategy is a practical, safe, cost-effective way to make that happen. The infrastructure and technology are ready to go, with the convenience sector providing ready-made retail infrastructure and experienced operators.

And convenience stores are just a start. The strategy can expand to include coffee shops, condos, gyms, grocery stores. Products can be segmented to different demographics the same way alcohol is—e.g.: recreational products in bars; wellness products in long-term-care facilities. The wider the network, the better the access and more competitive the pricing—which helps close the black-market gap and deliver more tax revenue to governments.

They just have to give it the legal nudge it needs to take off.

REACH OUT TO US FOR MORE BRAND PERSPECTIVE AND GET US WORKING FOR YOUR BUSINESS.

perennial-perspectives

REACH OUT TO US FOR MORE BRAND PERSPECTIVE AND GET US WORKING FOR YOUR BUSINESS.