CANNABIS XPRESS, CEO, Chris Jones
CANNABIS XPRESS, CEO, Chris Jones
Leveraging his experience in M&A at Origin House (acquired by Cresco Labs) and Star Buds Cannabis Canada (acquired by CordovaCann), Chris Jones built a low cost, profitable dispensary chain.
Overview
Introduction and background
Chris founded Cannabis Xpress in 2018 after selling his previous cannabis retail chain, Star Buds Cannabis Cannabis. He has experience in Cannabis M&A and Distribution from his time at Origin House. Cannabis Xpress currently has 16 stores in Ontario and New Brunswick, focusing on smaller towns without other dispensaries present. According to MJBizDaily, as of January 2024, there were more than 3,600 legal recreational dispensaries in Canada, or slightly less than one store per 10,000 residents at the national level.
Cannabis retail strategy and location selection
Jones selects locations based on lessons from California's oversaturation. He opens in towns without other stores to dominate local sales and avoid competition. Local demand alone must sustain stores, not tourism reliance. New Brunswick's private licenses attracted him with guaranteed store monopolies.
Competition with government-run cannabis stores
Government stores ensure consistent experience but limited selection. Jones believes private stores increase tax revenue by attracting customers who dislike buying from the government. In British Columbia, private stores face margin pressure from government stores' distribution cost advantage.
Lessons learned from previous cannabis businesses
Jones applies hard-earned lessons to Cannabis Xpress. He maintains a lean structure, selects low-rent locations, and trains specialized staff to focus on a curated product selection. Previous ventures informed strategic expansion and productive partnerships with provincial regulators.
Expansion plans for Cannabis Xpress
Jones plans to expand in New Brunswick (currently have 3) if awarded more licenses. His goal is to eventually sell the profitable business but will continue expanding across Canada if no suitable buyer emerges in 2024 after expected industry consolidation.
Cannabis retail M&A landscape in Canada
Many struggling cannabis retailers seek buyers but demand unrealistic valuations for unprofitable stores. Jones expects more failures in 2024 to increase demand for strong operators like Cannabis Xpress, finally creating an attractive exit environment. Larger LPs may still pursue strategic acquisitions for market share despite debt loads.
Transcript (lightly edited)
@0:17 - Dai Truong (Arlington Capital Advisors)
Hey, Chris, thanks for joining Highly Objective. Glad to have you. Can you help listeners with your background and tell us a bit more about what led you to Cannabis Xpress?
@2:20 - Chris Jones (Cannabis Xpress)
Thank you for having me on. I've been a big fan of your podcast. Been listening for a while, so it's nice to be included amongst some of the other people that you've interviewed.
My name is Chris Jones. I am the founder, CEO of Cannabis Xpress, which is a chain of cannabis retail stores in Canada. Currently we have 16 locations with another one opening up in the next couple months, so we'll be at 17. 14 of the locations are in Ontario and the other two are in New Brunswick and then the third one that's going to be opening soon will also be in New Brunswick.
I've been in cannabis retail for about out close to five years now. I started and sold a previous chain of retail stores under a different name before I started Cannabis Xpress. And my, I guess, going back further, I was in the industry previous to the retail where I was working at a cannabis M&A company, which was based out of Toronto. It was originally called CannaRoyalty, and then it rebranded, changed its name to Origin House, and then it was eventually bought by Cresco Labs. So I was there for almost three years, and I worked on about six M&A transactions where we bought companies. Most of them are in California. One was in Canada, and then about six to eight smaller $1-2M investments into different brands in California.
So I've been in the industry for about, I'd say, seven, six, seven years now. And it's, , different aspects of it. You know, most of it, I guess, at the beginning was, , M&A aspect, we're buying companies that were distributors, growers, then finally transitioning to my current retail business.
I've seen all aspects of the value chain in cannabis and then eventually I've landed on having my own chain of retail stores in Canada.
@2:29 - Dai Truong (Arlington Capital Advisors)
Origin House was mostly distribution, And that's kind of why Cresco bought it to get Distribution in California.
@2:36 - Chris Jones (Cannabis Xpress)
California is an interesting place because of how competitive it is. I think out of every state in the US it's probably the most challenging to do business in primarily because the illegal market of growers and sellers and everything else is still very prevalent, as well as the taxes are very high out there and then there's a lot of cities and towns that have opted out of having retail stores in them.
But I guess the primary focus of Origin House at the beginning was a distributor, so we bought two distribution companies in California, and then Cresco was entering into California and then wanted a company that had access to all the retail stores that we were distributing to, and then they wanted to roll out their line of products and get them into retail stores as well.
So it was a mix of the distribution capabilities plus the facilities, the assets that we had for growing cannabis as well, because we had two facilities that we used for growing out there as well.
@3:45 - Dai Truong (Arlington Capital Advisors)
Got it. Yeah, I do remember it was more than just the distribution, but distribution was sort of the main rationale that I remember from that deal.
So knowing that you spent time at Origin House and that was sort of what a strategic buyer thought was interesting. Can you help us understand Canada, why you chose retail, which from my purview is still very competitive, similar to California, especially in California.
Ontario, why not go after the distribution tier?
@4:13 - Chris Jones (Cannabis Xpress)
For that's a good question. So for a bunch of different reasons. Basically my experience in California was highly beneficial to the work that I'm doing now because, , the laws in California, like the legalization and everything else happened a lot sooner than it did in Canada.
So it was interesting to follow more of a similar type of market over there and how it evolved and seeing how oversaturated certain areas got, it was clear to me that there are certain aspects of the value chain of if you want to be a grower, a retailer, a distributor, which one made the most sense.
And then when I was following everything that was happening in Canada, I saw it was so early on in the provinces, so Alberta was very early to have retail stores. So in 2018 when the laws changed in Canada, some provinces were a lot faster to open up retail stores than others. Ontario obviously has the most amount of retail stores now, but at the beginning it took quite a while before all these stores opened up. So I was looking at Alberta to see what happened over there and it was just a huge influx of retail stores opening up in major cities and it just got very saturated as well as if you're looking at growers, a lot of the growing companies were publicly traded at the beginning. And a lot of them were incentivized I guess incorrectly by trying to have the most amount of growing space possible so the capacity of some of these growers at the beginning was just way too much, more than the entire world combined and seeing how saturated that got and then looking at typical CPG products and brands like if you think of any product you buy on a daily basis. Or if you look at alcohol or tobacco, most of the products, like the input ingredients aren't typically owned by the brand that's selling them.
So a lot of people know big brand name companies, but they don't really know where the ingredients of the products actually come from. So just seeing that also made me realize that being a grower probably isn't the best spot to be in, especially considering how many growers there are and how competitive it is. Growing cannabis for me was eliminated as a potential business idea and then looking at distribution. So distribution in different states in the U.S., there's a specific type of license for that, but in Canada, there isn't.
So distribution primarily in Canada is run by province or like a crown corporation that's owned by the province. So being a distributor also wasn't an option over here because of the regulations and how the framework was set up.
So looking at what other options are available, I saw retail as an interesting potential option. Retail started opening up. In Ontario specifically, they had two lotteries for licenses, and then they opened it up to a first-come, first-serve type of model where anyone can apply, like you can apply, even if you're based in the US, and then you pick a location, you make sure it meets all the right criteria and then you can open up a store.
So seeing that made more sense to me just because I knew it would be saturated but only in certain areas, which led me to eventually starting Cannabis Xpress, where most of our retail stores are primarily in small to medium-sized towns. So I picked locations where we're the only ones in town. So typically, most of these places, the population is pretty low, so a lot of the larger retail companies didn't want to open up stores in these places just because they're basing their potential revenue of the store based on the population. And I found that, for the most part, in smaller towns, the consumption is actually significantly higher for people in smaller towns for cannabis, like the amount that they purchase and consume.
So, even though I've found that some of these towns have a pretty low population, they actually consume a lot more. So, from seeing that, we decided that was the main strategy for our location selection. So, we opened up many locations where we're the only one town, which has been, very, very successful for us. So, that's, , primarily why I picked retail. I guess going back to your original question was because, , the other aspects of the value chain I just found to be, very saturated and it just there wasn't there wasn't anything competitive that I felt I could bring to opening up a business in being a grower and obviously distribution was was off the table so retail made made the most sense for me even though I don't have any formal retail background experience.
@9:32 - Dai Truong (Arlington Capital Advisors)
And I think in Canada there's only two provinces that allow private sector stores right?
@9:40 - Chris Jones (Cannabis Xpress)
More than two. So I guess we look at Canada as a whole so Alberta you're allowed to have private stores. British Columbia has a mixed model where they allow private private stores as well as they have their own public stores and then Manitoba, private stores, then going further east to where I just started opening up stores recently. So in New Brunswick, it’s a very unique province because it originally has all government-run stores, so they have about 25 locations called Cannabis NB, and then they realize that there's a lot of smaller towns in New Brunswick that required stores, but it didn't make sense for them to open up these larger format locations. So New Brunswick decided to issue 10 RFQs or government proposals for anyone to apply to open up stores there.
So when I came across this, I was highly, highly interested because I never expanded out of Ontario before and I realized that if I were to win some of these licenses, I would pretty much be the only store in town forever. So I applied for all 10 licenses, and I was successful in being awarded several of them. So I opened up the first private store in New Brunswick in June 2023. So about seven months ago. And then I opened up my second store in New Brunswick, in the middle of February 2024. And then I'm currently working on opening up my third store in New Brunswick, which should be open summer of 2024. So this year. So that's a unique province because it has a mix of both public and private stores.
And then I guess the other provinces, smaller, there's the Northwest Territories where they have five stores that are government operated, Nova Scotia, they have government stores as well, Nunavut. But I believe there's might be one store right now in Nunavut, which is a private store.
And then Ontario is open, it's all private stores, no government stores. And then Prince Edward Island is all government stores. And then Quebec, all government stores, Saskatchewan, there’s private a store. And then Yukon, there's only one store right now and it's government operated.
So there's a different mix between province to province but primarily for the larger provinces, it's either all private stores or like a hybrid model of both and then typically the smaller provinces with a lower population, it's mostly government-run stores.
@12:33 - Dai Truong (Arlington Capital Advisors)
And help us understand, most of the listeners are in the US, why did some provinces choose to either privatize, have a hybrid model or just operate it themselves?
What are the benefits to them and do you see any of these provinces switching, because we see that in the US as well with regards to liquor stores where some of them are state-run and usually it's not that exciting from a variety standpoint.
I'm based in Pennsylvania, I go to the liquor stores here which are state-run and it's the same selection everywhere and they usually don't take on newer brands. So I actually have to go to New Jersey if I want newer liquor brands. So help us understand that sort of thinking for Canada.
@13:17 - Chris Jones (Cannabis Xpress)
Yeah, there's definitely pros and cons for having private stores or just government run stores. Like I do, like for example, when I go Quebec, its all government stores over there. And I like that it's consistent. I know if I go into one government store or another, then , the experience that I'm going to have is pretty consistent. So that aspect of it, I do like. But on the flip side of it, just like the comment you made where there are certain products that might not be available to people. And I think it depends on how the government is setting up their laws in regards to consumption for people.
Like I know Quebec is typically a little bit, try and protect their people a little bit. more, I guess, than other provinces. So they wanted to control the retail aspect of it. So that's why I guess they opened up all government stores over there.
Do I think it's the right approach? No, I think there's definitely benefits of having private stores as well, just because, for example, the selection, the customer experience, and also having private stores, strongly believe decreases the amount of illegal products being bought.
Sometimes when I visit New Brunswick, this is before I opened up any stores out there, I was just visiting to look for locations. I just asked people on the street why they buy cannabis and if they do, where do they buy it from?
So I asked that question to a lot of people in both major cities and some of the smaller ones. A lot of people said, yes, they do consume cannabis, and it was pretty split between people who bought it legally and illegally and then asked them like why don't you shop from the government store and they said they just don't want to buy they don't want to buy cannabis from the government. So I think there's a lot of customers in some of the provinces that only have government stores that are really missing out on a lot of tax revenue just because there's significant amount of people who don't want to buy from government stores. I do believe that either a open model where anyone can open up a store or some sort of hybrid is beneficial but then in certain places like British Columbia there's been tension between private stores and the government stores. Because the government is usually the distributor as well so you're competing against the government who is your distributor and a competitive store that's nearby so they can obviously buy products for a lower price than you.
So if there has been tension I've seen in some provinces where it's like a hybrid model because the government stores can end up selling products for less than what you can sell them for just because they are the distributor.
And then in provinces like New Brunswick where I think they took the right approach by allowing private stores to open up they realize that the same with a lot of the other provinces like part of mandate for legalizing cannabis was to compete and eliminate the sale of illegal products just because there's still so many illegal products being sold worldwide. So I do believe that having more private stores will lower the amount of illegal products being bought. So New Brunswick was really forward thinking in allowing private stores to open up over there which was nice. But there's pros and cons of having an open market versus government stores like in Ontario where I am. It's completely open. Anyone can open up a store and there's no government stores. And then obviously, there's, some people who are complaining just because they open up a store and then someone opens up beside them and across the street and they want additional restrictions on how close stores can be to them. But, thinking like Adam Smith, like it should just be a completely open market. Like my preference overall would just be all private stores and completely open.
Anyone can open up anywhere they want. Obviously not near school and whatever else. And that's how I think that that's how I really believe that the regulation should be. But each province is slightly different. But primarily where most of my stores are in Ontario, I'm the only one in town.
So I don't really have to worry about people opening up the street for me. Because once you have one store in town, it doesn't really make sense for anyone else to, to try and open up there. And then New Brunswick, it's obviously very lucrative for us being the only one allowed in a certain town pretty much forever, so I'm sure you've seen as well in the U.S. Like any limited licensed state that has a license state where you're the only one that's allowed to grow or sell the product, typically those licenses are valued at a lot higher than a place like Ontario or California where it's more open market.
@18:32 - Dai Truong (Arlington Capital Advisors)
Yeah, if I just looked at stores per 10,000 residents in Canada, the average is 0.92 across all of Canada and Ontario is like 1.14 stores, New Brunswick where you're in, it's 0.46, so very favorable and Quebec is the lowest by far at 0.11.
So given it's a government-run province and some of these government-run stores, they just don't have as many stores, right? Because their desire may not be to open hundreds of stores across Canada. Is that and sort of the fact that only the government can open in Quebec which makes it so low of a licensed racial per 10,000 residents?
@19:19 - Chris Jones (Cannabis Xpress)
Yeah, Quebec is more unique just because I do know their employees are unionized and there were some issues between the union and the Crown Corporation that owns the stores. So Quebec is a little bit unique but they definitely need more stores and I think what happens is when the government opens up some of these stores they end up being very big. They end up being big and very expensive for them to open, so I think from like a cost standpoint opening up in some smaller regions in Quebec probably just doesn't make sense for them to do. But a private store like myself who has small square footage, really lean team, not unionized. Is able to would be able to open up a store for a lot significantly less than the government in New Brunswick. So private stores, I think, have a lot more cost savings and can open up a lot faster than the government stores.
But in Quebec, there definitely should be more retail stores, , in some of the smaller regions.
@20:28 - Dai Truong (Arlington Capital Advisors)
And then I want to also talk a bit more about when you have to compete against the government. So let's like British Columbia and your comment on them being able to buy at a lower price. So shouldn't they have to sell to everyone at the same price, whether it's their own stores or the private stores.
Otherwise, it's like why even get into it, if you're a private store in British Columbia, if you're competing and your margins aren't going to be as good as the government.
@20:56 - Chris Jones (Cannabis Xpress)
I guess sometimes it isn't like a consumer, which you are as well. I don't think it comes down strictly to price. I think there's a lot of factors. When making a purchasing decision. I think usually the number one thing for retail stores, it's just the location and convenience. So if there's a location that's private, that's closer to you on your morning commute somewhere on your way home. You will probably be more likely to stop there. Even if you had to spend $2 or $3 more on a product than going out of your way, 10-15 minutes to another location To buy something for a little bit cheaper.
So usually convenience and location always eventually wins when it comes to cannabis retail. So you can have a location that's like a tiny Cannabis Xpress store that's on your way home. That might be maybe a little bit more expensive. Like if I wasn't in British Columbia and it might be better to stop there versus going all the way to the government store. So convenience and location is really important. So you're able to compete on that with the government.
And then product selection, you might be able to select different products than what they sell. They might not carry every single item. So you can have products that they potentially don't sell to bring customers in. And the overall experience, you can have a different way of training your staff. They could potentially be more knowledgeable than going to the other store and just developing that relationship with customers.
So I think price is a factor, but I don't think it's the top three factors. Obviously, it really depends on the price difference. Like if it was $10 versus $11, I don't think it matters too much. But if your price is double, $10 and $20, then, customers might end up driving a little bit further to go to the cheaper place. But I think there's, there's other factors that are more important than just the price. So you can compete with the government stores on those factors more so.
@23:11 - Dai Truong (Arlington Capital Advisors)
That makes sense. And then for you, in terms of building out Cannabis Xpress, the obvious lesson I’m taking away from what you've done different from people who've done it before you and maybe are no longer in business is you're certainly looking at less competitive spaces. You're looking at paying less for rent, meaning, smaller footprint, but also you're probably just paying less per square foot. What other lessons have you taken that you're applying to Cannabis Xpress from those that have come before you to make sure there are things you do and there are things you don't do.
@23:44 - Chris Jones (Cannabis Xpress)
Oh, tons and tons of lessons from just being in the industry. Like, I know that, I guess at the very beginning, the way the company is set up. A very lean cap table, not bringing on tons and tons of people. So I think at the very beginning, just making sure you have the right amount of funds for expansion for inventory. And extra cash in case something happens. So even just at the very beginning with how the company was set up was really important.
I'm sure you've seen as well just really wonky cap tables where there's tons of shares and options and warrants and just lots and lots of stuff that make it really messy, especially from an operational aspect if things aren't going well. So having a very clean cap table at the beginning was very beneficial as well as making sure we have the right amount of funds in the bank to actually start and expand the business.
And then just the location selection, it was really important for us to find locations where no one else was. I would rather be the biggest fish in a small pond than try and compete with people that are much more well capitalized than us and can run their business at a loss for a long time. Like we didn't raise that much money when we started this business. So we're not going to sell products at a loss. So we need to be cash flow positive or else, we're going to end up going out of business.So luckily, the strategy has paid off. We are a profitable business. And the locations that we picked have been successful.
And then also, on the operational structure of the business, I've seen a lot of people. I still do at some cannabis events that I go to where I meet a brand and then they introduce me to their CFO, their CMO, their COO. And I'm looking at them like all of you people, working for this company that pretty much has no revenue. It just, it doesn't make sense, it doesn't make a lot of sense. So having a very lean functional team of people, I didn't hire my friends to do marketing for us, like it just didn't make any sense. So the people, the team at the very beginning, and then when you expand, the people you bring on are very important.
And it's been better for us to not overhire which sometimes if you overhire then obviously the work is spread out a little bit more vs. us where we work pretty long hours just because we didn't want to overhire at the beginning and have a huge cost of labor. The functional team is very important and then just making sure that we train all the staff properly like I've been in some stores where staff aren't really trained on products so making sure we have a strong training system for all of our employees that's been very important.
And then just generally on expansion like trying to find new locations to expand into like the new Brunswick expansion for us has been extremely beneficial. They are some of our most profitable stores already just from opening them up so that's been very useful and then just selecting the right products to get in the store. Right now in Ontario there's close to 5,000 products that we're able to order into the store and we have a very limited product selection, which obviously goes down to having small locations where we can't physically fit that much product. But also you don't need over a thousand items in the store like I've been to some stores where they have over a thousand items and the inventory carrying cost is super high. Tons of products get lost and then staff are highly unlikely to be trained on a thousand different items so having a limited selection allows our staff to be trained much better on those items, those products and then we can check out people a lot faster. If you're searching for an hour to find something that's one product left in a box that's hidden versus us where everything's on a few shelves and they can just grab something in the customer and leave.
And then the speed of those transactions allows us to pass on those cost savings to our customers. Just the right pricing strategy has also been important. I know some stores their margins or the price they set product at is just way too high and customers don't want to shop there. So figuring out the right product mix and the right strategy on pricing has also been very successful for us.
So I'd say it's a mix of things but my experience before and having the previous retail chain, I had four stores that I sold before starting Cannabis Xpress has been very beneficial for us to expand and be profitable as we expand.
@28:53 - Dai Truong (Arlington Capital Advisors)
Your comment about going to cities, and places within those cities where there's not really another cannabis dispensary. An average, how far away is the next closest dispensary?
@29:07 - Chris Jones (Cannabis Xpress)
Some of them, I'd say 20 minutes to an hour, on average, for people to drive to another store. 20 minutes doesn't seem like a lot, but, 20 minutes there, 20 minutes back, you're shopping in the store, the time really adds up. We're not completely in a place where it's hours to drive to a cannabis store, but I'd say typically 20 minutes to an hour away.
@29:39 - Dai Truong (Arlington Capital Advisors)
So would it be safe to assume that most of your customers, let's say 90-95% are really locals, or are you in some places where you're getting a decent amount of tourists? I'm just thinking based on what you said, it's probably a lot of the local crowd that is buying on a monthly basis.
@29:59 - Chris Jones (Cannabis Xpress)
Correct. I'd say both. So we're in some places that are highly, highly touristy. I make sure from the beginning that the local public population is strong enough to support sales because you don't want to be in a place where you have to solely rely on sales from tourists because looking at what happened during COVID, like a store shut down and no one's traveling, then your whole business just crumbles. So I want to make sure at the very beginning that just the local population alone is enough for the store to be profitable. So that's the first thing I look for. And then obviously if there are a lot of tourists there, then great, that's more of a bonus. So we have stores in some, like we have a store in Wasaga Beach, a store that's just south of there where a ton of tourists or people that drive up north for winter activities like skiing, snowboarding, and then even summer ones like hiking, cycling, things like that. So it's a mix of both people that live in the area and then we get a decent amount of tourism or people that are driving through that town to go somewhere else.
But, it is very important at the beginning to pick a location where you don't have to primarily rely on sales from tourists because things can change and tourists might not end up coming there for some reason.
So that's one valuable lesson because I have seen some stores open up in very touristy areas where if the season's down and you don't have any sales that summer, that's pretty much like you could make 90% of your sales in the summertime, and if no one comes in the summer, then you're going to run the business at a loss for the full year. So making sure the local population is enough to sustain the stores is important.
@31:48 - Dai Truong (Arlington Capital Advisors)
And in terms of data on what brands do really well, can you help share some insights on Canadian LPs and sort of, from your experience, what you're selling in the store, what's doing well with consumers.
@32:05 - Chris Jones (Cannabis Xpress)
Typically, the category mix is pretty similar to probably what you see in places like California where you have an assortment of different products.The major category would be Flower, although it's in a decline like people are smoking less and using other types of products more. So Flower is still the biggest then pre-rolls, vapes, edibles, oils, capsules, concentrates, topicals and accessories and then finally beverages. So it typically follows the same product sales mix as most other major markets.
And then in terms of the brands that we sell in Ontario, specifically there's almost 5,000 products that we can order from so when we're ordering products we like to look at first there's a lot of growers that are going into bankruptcy right now so I'm looking for brands that I don't think are going to be going into bankruptcy just because I want to have long-term relationships with these brands, and if they're in financial trouble, then it's probably less likely that I'll want to stock their product because they'll be disappearing. So I usually look at, I have a mix of larger, publicly traded LPs, licensed producers that we buy from, some middle ones, then also some craft ones, I guess the bulk of just because they have a wider assortment of SKUs or products available for us to order from.
So yeah, we mostly, I'd say, a larger percentage from the larger LPs or brands, then some middle ones and some craft ones, but we try and get a decent, fair mix of products. Obviously, we don't want to be buying from the big companies, but also the small ones. So we do have a pretty good mix of products that we bring in.
Typically each store has about 175 to 200 unique cannabis SKUs. So we have a good mix that for the most part of the customer comes in, wants something specific. Even if we don't have it, our staff are trained well enough that they'll be able to make a different product recommendation based on if it's a certain terpene or flavor product that they're looking for.
@34:33 - Dai Truong (Arlington Capital Advisors)
So now that you're coming up on 17 stores very soon, what's on deck the last nine months of this year, and what's your plan for how many stores you want to be in at the end of 2024 and of 2025.
@34:49 - Chris Jones (Cannabis Xpress)
So the plan when I first started this company was to eventually sell it. So that is still on the table, is to sell the entire retail business. But for the remainder of this year, we will also be at 17 stores in the next couple months. And for New Brunswicks, where we'll have three stores, will open up more licenses and we'll be able to continue our expansion out there. Currently, we're the largest private retailer by revenue in New Brunswick, so I'm hoping to continue that trend. Potentially acquire some of the other private stores out there, but my main focus right now is on the New Brunswick expansion, so I'm hoping that more stores or more licenses open up out there. And if they don't, then we're going to look at potentially buying some of the retailers in New Brunswick and then eventually selling the business. So maybe we'll be at 20 stores by the end of the year and then ideally sell the chain of retail stores to someone else, but if the number isn't right and we can't find the right buyer, then we're just going to continue our expansion, potentially opening up more stores in Ontario and then obviously in New Brunswick and then we'll likely be looking at other provinces that have a system where you can apply for license and you could be the only one in town.
So there are other Eastern provinces where they have a similar licensing structure where you open up a store and you don't have to worry about someone opening up right beside you. But the plan is just to continue expansion profitably until the time is right to sell the business to someone else.
@36:30 - Dai Truong (Arlington Capital Advisors)
I thought you were capped out in New Brunswick because you guys have won more licenses than the cap. So you couldn't open those extra ones.
So two questions on that is if there's a new round of licensing, will they automatically award you a certain amount or you just start from zero in this new license process. And Does that mean you couldn’t open them when they were awarded but you could actually still acquire them now from someone else who's opened in New Brunswick?
@36:58 - Chris Jones (Cannabis Xpress)
Yeah, that's a good question. So there's a cap of 30%, so I guess a person or corporation can only own 30% of the total number of licenses in New Brunswick. When they initially issued the applications, they didn't want one company or person just to own them all. If they were to win every single one, because maybe they're not in the best financial spot to open them all up or operationally, so they wanted to make it more fair.
But now that they've seen how well we can perform in New Brunswick, they are a very forward thinking province and the people that we work with at cannabis New Brunswick are extremely intelligent and very easy to work with. So I'm hoping that this hasn't been said, but I'm really hoping that potential changes can be made to that 30% cap of how many stores you can own, just because I think at the beginning when they set it up, it was more so just to make sure that the people that are opening up stores can actually successfully operate that many locations. And now that we have a proven track record out there of opening up stores, running them profitably, we're hoping that potentially that might be changed, where we can own, say, 50% of the total number of licenses.
But you are correct. If they only issued one more license, as it stands, we wouldn't be able to open up that store just because we would be currently at the cap or limit right now. So I'm hoping that either a change can be made where they allow, say, 30%, it goes to 50%, or they just eliminate it completely. I'm hoping that could potentially happen, or if they do issue more licenses, then they'll issue, say, like, five locations. I don't think they're going to issue only one. There'll probably be many. So if they do issue five, then we'll be able to apply for at least one or two of them out there. You are correct that if they only issue one or they don't issue any, then we would have be at the limit and we wouldn't be able to buy someone else currently because we're at the limit, but they are flexible and they're really open to communication and working with the retailers in New Brunswick.
So I'm hoping that we'll potentially be able to lobby them for some changes that will benefit everyone in the province.
@39:30 - Dai Truong (Arlington Capital Advisors)
And going to the point about M&A, I think there are some stores right now, especially in Ontario, where folks are just saying, hey, if you want to acquire my liabilities for just the value of the assets, acquire it for that, there's not much of a multiple applies to revenue or EBITDA.
And so a two-part question, Are you seeing a lot of these deals that are kind of like that? And on the flip side, if you're looking to exit, when does the exit environment become more attractive for a company like yours and who does that come from?
@40:02 - Chris Jones (Cannabis Xpress)
Yeah, there are a ton, a ton of stores that I get on a weekly basis. I get cold emails from other retailers who say, hey, there’s one store, two stores that we want to sell, so I've evaluated probably at least 100 –200 different, either single store or multiple location businesses that are for sale. And only one of them that I've come across has actually been attractive and I made them an offer and then they ended up wanting to keep it themselves, but all the other ones I've seen, what ends up happening is they have one store, they spend a million dollars to get it open and it ends up losing money because the rent is too high and the sales are too low and I ask them what do you want for this because the store is not making any money. And they just usually come back and say, we just want what we put into it and I'm like, well how much is that and they say a million dollars. And it's completely laughable, like a million dollars. No one's going to pay that much money for that location that's losing money. So for the most part I think a lot of the stores that are for sale right now are just losing a lot of money when people open them. They overspent, they picked bad locations and they just didn't realize how much work it was going to be.
I think they just thought, I'm like cannabis, everyone smokes weed. This is going to make us a lot of money and we ended up doing the opposite of that. So there haven't been many attractive retail stores that I've seen for sale because generally there's a lot. There's a few large public companies that have over 100 stores. And then there's some that are just private and are profitable like myself that are making money and aren't really for a sale It's usually just the ones that are losing a lot of money that are for sale right now So for us, it's yeah, go I go through their financials and if it's You know for the most part, it's impossible from what I've seen to bring some of these stores back from the dead. leases are just way too expensive and the sales are just way too low.
And then I guess the second part of your question was who would potentially be a buyer or when do I think the market conditions will improve? I'm hoping by middle to end of this year, 2024, that the conditions will improve where a lot of the stores that aren't profitable either shut down or maybe they get sold but I think once a lot of the stores that just aren't doing well, disappear, then [the] profitable ones will be selling at a much higher valuation because a lot of the stores are just asking for either like nothing or just the cost of the inventory. So even though it shouldn't, it does drag down the value of the people who are profitable. Because if you’re being sold for nothing and then when someone who does have a profitable business wants a much higher multiple, it gets turned away because you're looking at all these companies that are just kind of giving away their assets for nothing.
So I do think once there's a wave of shutdowns, not just on the retail aspect, but there's a lot of companies that are growers that are going into bankruptcy right now, a bunch that I've seen lately. So I think this year, probably at the end of this year, there's going to be just a big wipeout of companies that are just poorly run, have too much debt. And then once that happens, the people that are profitable in making money are going to shine a lot brighter.
So I'm hoping at that point in time the valuations will be higher, for not just my business, but the other companies that are looking at acquiring or just their own valuation will be higher. It'll be more beneficial to everyone closer to the end of this year, once a lot of the companies that are just losing a lot of money disappear.
@44:13 - Dai Truong (Arlington Capital Advisors)
But what catalyst would be presented to some of these larger strategic LPs, right? So the Auroras, the High Tides to go and do acquisitions because some of them have, I think, more debt than they do cash. So they're also trying to make sure they're servicing debt. So I guess, unless you're very profitable and there's cash flow and they can use that to service some of their debt, it wouldn't be too attractive for them to step in and start doing acquisitions, even if some of the poor performers go away.
@44:46 - Chris Jones (Cannabis Xpress)
Yes and no. I think some of the four performers go away and then they're I guess we're looking at the public ones.
The value of their stock will increase in price and then they can either. I got it got a little easier during COVID, Ithink it was cheaper for companies to take on debt than to raise money through equity. But I think things have changed recently where now it's almost cheaper to issue new shares than to take on additional debt. So it depends, like if myself or any others, if we're looking at being bought by a public company, it could be a mix of cash and stock. Obviously you have to be careful taking stock from a company that isn't doing well, so that's always concern, but there are ways to structure the deal, especially if you're cash flow positive, it is accretive for some of the public companies, but there's still a ton of private companies as well that have enough cash to pay in cash, right?
So I don't think that people aren't going to be buying anyone because of that situation. Because there's only three or four public companies in Canada that are in retail. So I still think its still accretive for them to try and structure a deal where they buy retailers, even if they do have a significant amount of debt.
@16:16 - Dai Truong (Arlington Capital Advisors)
Yeah, I think it's just more some of these guys trying to tell the story that they're going international. They’ve been doing that and been trying to tell that story and that's kind of what got some of these guys into trouble. But trying to say, hey, we're going into Germany, now, or if you’re Tilray, hey, we're going to have more EBITDA because we're getting into beer and getting into hemp and CPG.
So I think if I think from an IR investor relations perspective, you kind of have to sell the sort of why you're doing something. So they have to say, hey, we believe there's so much market share to grab and profitability in owning retail in Canada.
So I guess you believe that that should still be on the horizon for some of these larger players in Canada.
@47:00 - Chris Jones (Cannabis Xpress)
Oh, definitely. I know I see it. I follow a lot of the cannabis news, which I'm sure you do as well.
Where all the companies are now saying they're gonna enter Germany and we're gonna be the biggest in Germany now that changes have been made. I think some of it is just trying to get the stock to increase because there's people that are excited about new places opening up. But their core business is in a certain place like High Tide or whoever, their core business is in Canada, so it might be attractive to say that they're looking at other markets, but I've also seen a lot of companies fail at expanding too fast or expanding into international markets where they don't really have a presence. There's tons of companies, especially at the beginning, they bought LPs or whoever internationally, and then a lot of those assets were just stood up, go bankrupt or they get sold to someone else for for pretty much nothing.