Costco of cannabis? Pot shop stock surges ahead of discount rebrand

·4-min read
Last month, High Tide unveiled a new retail concept focused on “value-sensitive” pot shoppers called “Cannabis Chop Shop,” complete with the tagline “wholesale prices to the public.” (PROVIDED)
Last month, High Tide unveiled a new retail concept focused on “value-sensitive” pot shoppers called “Cannabis Chop Shop,” complete with the tagline “wholesale prices to the public.” (PROVIDED)

Canadian cannabis retailer High Tide (HITI.V)(HITI) is stealing Costco’s (COST) strategy with a new focus on aggressively lower prices and exclusive deals for loyalty club members. Analysts at ATB Capital Markets expect the plan will boost the company’s stock, which has already climbed more than 75 per cent year-to-date.

Canadians spent $356.9 million on recreational cannabis in August, according to Statistics Canada, a sixth-consecutive month of record sales. In Ontario, Canada’s most populous province, 92 per cent of sales (including accessories) took place in private retail stores, according to the crown corporation that oversees the legal pot market. 

High Tide is among the largest pot shop operators in the country. The company said on Oct. 25 that it has 103 retail locations spanning Ontario, Alberta, Manitoba and Saskatchewan under various banners, including its Canna Cabana and Meta Cannabis Co. It also owns and invests in e-commerce businesses that sell pot accessories like pipes and bongs, as well as hemp-derived CBD in the U.S. and U.K., and the European Union.

Last month, High Tide unveiled a new retail concept focused on “value-sensitive” pot shoppers called “Cannabis Chop Shop,” complete with the tagline “wholesale prices to the public.” The pot chain said last week that all of its stores will transition to the discount club concept, following triple-digit sales increases at two pilot stores since mid-April.

“Our successful pilot projects clearly demonstrated that exclusive access to high-quality and affordable products can drive growth in both sales and customer loyalty,” chief executive officer Raj Grover said in a Oct. 20 news release.

High Tide’s retail rebrand comes as pricing pressure intensifies across Canada’s legal pot sector. Major licensed producers are growing more vocal about rising competition, and their desire to move away from selling less-profitable discount-priced pot. At the same time, pot shop openings have spiked in Ontario cities like Toronto and Hamilton in recent months, forcing many retailers to compete on price against multiple nearby stores.

High Tide says it has already begun offering “steep club discounts” on pot products to its more than 245,000 Cabana Club members. Membership is expected to remain “free to join over the short term.” High Tide says it may introduce a fee and offer “annual profit share/cashback or other perks to members,” in accordance with government regulations.

The company says its plan is modelled after “a proven and leading membership-based grocery discount club retailer.” ATB analysts Frederico Gomes and Kenric Tyghe read between those lines in a recent note to clients.

“[High Tide is] mirroring the strategy of large discount retailers, such as Costco,” they wrote on Oct. 20. “We view a discount club as a way for High Tide to capture market share and differentiate itself from other retailers while building customer loyalty and brand equity.”

However, the analysts warn the plan requires bargaining power over suppliers, which may prove challenging, given provincial control over pot sold to retailers in most jurisdictions. They also note commentary from management about weaker gross margins, which could hurt near-term profit.

Gomes and Tyghe maintain an “outperform” rating and a one-year target price of $13.25 per share on High Tide’s TSX Venture-listed stock. Shares ended Tuesday’s trading day down 2.22 per cent at $6.60. High Tide shares also trade on the Nasdaq exchange.

The analysts expect High Tide's annual sales to grow 118 per cent year-over-year to $177 million in 2021, and then hit $262.9 million in 2022.

Of course, High Tide is not the first Canadian pot retailer to draw inspiration from a major U.S. grocery brand. Fire & Flower (FAF.TO) CEO Trevor Fencott told Yahoo Finance Canada in June 2019 that his company aspired to be “the Whole Foods of cannabis.”

High Tide’s chief rival, with 95 corporate-owned cannabis stores in five provinces and the Yukon territory, appears to have largely abandoned this strategy. The company said earlier this month that it plans to open more co-locations with Circle K gas and convenience stores, in partnership with majority shareholder Alimentation Couche-Tard (ATD-B.TO).

High Tide’s Toronto-listed stock has climbed 76.47 per cent year-to-date as of Tuesday’s close. Fire & Flower’s stock has dropped 8.05 per cent over the same period. Meanwhile, the ETFMG Alternative Harvest ETF (MJ), a basked of major cannabis stocks, has been virtually flat year-to-date.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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