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How cannabis retailer High Tide plans to leverage ‘discount club’ model: Q&A with CEO Raj Grover

· Nov 11, 2021
Calgary, Alberta-based High Tide believes it has found an answer – at least in part. Advertisement The chain, one of the biggest in Canada with 104 stores, recently announced i ...

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In Canada’s hypercompetitive cannabis retail sector, stores are looking for ways to differentiate and build a base of loyal customers.

Calgary, Alberta-based High Tide believes it has found an answer – at least in part.

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The chain, one of the biggest in Canada with 104 stores, recently announced its transition to a “discount club” model.

The idea is to provide products to members at a discounted price.

“We’re building a club membership loyalty (model), and we hope to turn this into a North America-wide community and then a global community, eventually,” CEO Raj Grover said during an interview with MJBizDaily.

High Tide said its Cabana Club already has 270,000 members in Canada.

In the interview, Grover also welcomed Alberta’s plan to allow e-commerce sales for privately owned cannabis stores, following the lead of Ontario and British Columbia.

“The economics around delivery are not fantastic, but at least we are breaking the connection between the illicit market and consumers, who have been used to buying from the illicit market,” he said.

“Eventually those people (who buy online) will buy in bricks-and-mortar stores as well.”

MJBizDaily spoke with Grover about topics including the looming possibility of store closures in 2022 and opportunity in Canada and overseas.

High Tide trades as HITI on the Nasdaq exchange and the TSX Venture exchange.

A recent BMO Capital Markets report warned of retail closures in 2022 because of oversaturation of stores in some areas. As the CEO of one of the biggest retailers in Canada, what are your thoughts?

I think (analyst) Tamy (Chen) is making a good point, and I do have to agree with her.

We know there are almost 300 stores in Toronto alone now. There’s so much clustering happening in so many places.

I see this coming. It’s going to be unfortunate. The policies were not very well thought out, Ontario in particular.

High Tide is a little differentiated and hedged because of our diversified ecosystem.

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We conducted a value pilot since April in Manitoba, Alberta and Ontario. The findings were consistent: 70% of Canadian cannabis consumers strictly care about price.

If that is the case, there’s going to be a lot of independents and smaller businesses which will not be able to sustain the competition we’re all facing today.

The illicit market still remains strong, providing consumers (up to) 200 milligrams of THC in edibles – versus we (in the legal market) have to deal with 10 milligrams of THC in edibles.

If you see some U.S. markets, edibles are 10%-15% of sales. In Canada, they’re about 3%-5% of the sales, and I don’t see this changing any time soon.

So these issues, plus store clustering, compounded, I think the market is going to balance itself out in 2022.

In October, High Tide announced it was transitioning its 100-plus stores to a “discount club” model. How is that different from a “value” strategy being pursued by some of your competitors?

Now that we’ve become a discount club retailer, that doesn’t mean that we are only providing value offerings to consumers.

We are actually providing them with a complete premium selection, but at the most discounted prices you can get in Canada.

We produce 75% of the 5,000 accessories we carry in our catalogue. We are now providing these accessories at a massive, discounted delta to our customers.

These are high-end accessories.

It’s not just a small-value selection. It’s the full extended catalogue at discounted prices.

We’re also providing a curated selection of premium cannabis products.

We continue to build more High Tide in-house brands. We’re building a club-like membership community, which is sort of inspired by Costco.

It’s a similar model, which will give us an opportunity to include a membership fee at some point, subject to all regulatory approvals, and potentially providing cash back and other initiatives to our members.

What regulatory issues are pending with the club?

It’s less of the membership fee that is a problem for the Cabana Club; it’s more of the perks, cash back and other initiatives we want to give back to our members.

So we’re trying to find a balanced approach on when to introduce it (a fee).

We can take action on the membership fee today, but I’m not in a rush for that. That is a bit down the road.

The largest licensed producers have lost significant market share in 2020 and 2021, despite spending billions of dollars buying competitors. Can you share your perspective, as a retailer, why consumers seem to prefer products from smaller companies?

I can see this unfolding in front of me. There’s a lot of consolidation happening in the Canadian market on the producer and retailer side.

The M&A continues, but you’re right, they’re not able to breach even 20%.

The biggest reason we see as a retailer is because of the craft producers.

The smaller guys are coming in, doing a great job and taking significant market share.

The smaller guys, craft producers, are doing a really good job focusing on the product itself, and it’s showing in sales for them.

Larger players are unable to take advantage, although they continue to do M&A.

They’re buying companies, but not necessarily craft producers that the consumer today cares about.

Canadian LPs have spent billions of dollars on M&A overseas with little to show for it. High Tide is also active in M&A overseas. Can you tell me how your approach is different, if it is?

We are cherry picking companies that fit really well in our ecosystem, and we’re paying decent multiples.

My last acquisition, Blessed CBD, we paid four-times EBITDA.

These acquisitions are instantly accretive to High Tide.

We’re in our comfort zone. We’re not overextending ourselves. We’re not growers or producers yet.

When we get to the U.S., in certain states there is opportunity for vertical integration, we’ll surely look into it.

But if you look at my last five acquisitions, they’ve all been direct to consumer, e-commerce platforms. That is the way of the future.

None of these deals were Canadian deals. They were all U.S., and now my first one in the U.K.

And there’s more where that came from.

Is part of that discipline only buying certain companies?

Part of the discipline is the company has to be a really good fit in our ecosystem.

Now that we purchased Blessed CBD, can we produce Blessed and FabCBD (another acquisition) products in a different manufacturing facility together to save dollars? Yes, we can.

Can we bring these brands into Canada through a partnership with licensed producers and sell our own brands in 103 stores and counting in Canada? Yes, we can.

They need to be profitable. We’re not interested in turnaround stories.

Matt Lamers can be reached at matt.lamers@mjbizdaily.com.