GoBlue2016 wrote: Well look at this.... Did I not mention in the OP that direct mail would be hijacked by Provinces.
Financial Post
Gordon H. Fox: To eliminate illicit cannabis market, we need e-commerce
https://nationalpost.com/opinion/gordon-h-fox
Fox is CEO of Emblem
"Since many provinces may not have retail locations ready for July 1, 2018, Ottawa is contemplating a temporary e-commerce delivery system, through which Canadians will be able to order lawful cannabis from licensed producers over the Internet (just like they can with many other consumer products)... However, comments by various government representatives suggest the government intends to put an end to this e-commerce model once provincial retail stores are in place."
"The federal government is the only level of government with the constitutional authority to govern the e-commerce delivery of adult cannabis, as the undertaking involves a regulated substance, inter-provincial trade and commerce, and mail: all federal areas of responsibility under the Constitution Act, 1867. In making provision for a permanent e-commerce model, though, the new Cannabis Act should still allow for retail distribution. Consumers should simply be able to choose between purchasing cannabis in stores or online. The provinces and cities could maintain responsibility for the retail sale of cannabis “at the street level,” since these local undertakings are quite properly within their purview."
I can see the Provincial Finance Ministers wrapping their fingers around Direct Mail through provincial web portals.
Those JUICY direct mail margins will be transferred to the provinces.
Nice to be low cost, eh?
GoBlue
GoBlue2016 wrote:
How much extra capital will LP's need to raise to float payment terms for Rec and Pharmacy?
As we approach day 1 of rec we also approach non cash payment terms for sales.
LCBO isn't paying cash at delivery like current patients do. The provinces will be getting approximately 90 days from receipt of goods or invoice from LP's to pay for their mj. Private rec models for distribution certainly won't get 90 days to pay like a province owned would. Many dispensaries might be on cash terms.
You may think, my LP doesn't have to worry about this as they will have Direct Mail and get paid quickly. However, what if Provinces with self owned distribution set up dual delivery: retail store front and their own direct mail program. If they go down this road, I would imagine for direct mail they would either 1) centrally warehouse inventory and ship provincially from the central location, or 2) set up a web portal with province as the face and LP's fulfilling shipments a la Amazon. The latter would likely be the most efficient. In the first option the LP would have to wait for payment. In the second maybe not, but they would have to send the province the province's cut of sales.
The provinces are incentivized to eat into LP's direct mail as much as possible, as it redistributes revenue to their province from that of the LP. More money and taxes for the provinces. So either excise tax or competing direct mail or both.
LP's with direct mail may be in the unenviable position of competing with their biggest customers. Customers that can limit LP shelf space in retail outlets if LPs don't play ball with them on direct mail. Or slap excise taxes that LPs will have to collect and remit (just like wineries).
For provinces that will own their distribution channels let's say 90 days for payment terms. The longer the payment terms the less taxpayer money is needed to set up retail distribution.
Pharmacy also comes with payment terms. National Pharmacy Chain terms are 120 days from invoice.
So LP's dealing with National Pharmacy are looking to have to float 120 days of sales in the form of A/R. This is in addition to minimum levels of inventory requirements on LP floors, as is required in most chain pharmacy contracts. So let's call it a month of inventory on hand and 120 days payment terms, for a total of 150 days of inventory and A/R combined.
In most businesses the banks would step up and lend 75-85% of the Accounts Receivable and 50% of Finished Goods inventory (that is what is called a "margined" or "borrowing base" operating line). But the banks are not likely to be there at Day 1. Credit Unions could provide the "margined" operating line, but CU's tend to avail pretty small dollar limits.
I reached out to a buddy who runs the commercial lending department of a local CU and asked him what a notional upper limit a CU would have on a "margined" O/L. He told me a Big CU could go $25 million but not margined. The O/L would have to backed by tangible security like multipurpose and saleable real estate.
So banks and CU's are not likely a solution, which leaves equity raises.
So if an LP expects to sell $10 million a month in rec they'll need $30 million in float to cover A/R. $20 million a month in sales is a $60 million float for A/R.
An LP that expects $10 million a month in National Pharmacy will need $50 million in float to cover A/R. $20 a month is a $100 million float for A/R.
We have been focussed on being fully funded for expansion. But does your LP have funding for the inevitable payment terms??
GoBlue.
Aphria longs: no worries Carl raised Pharmacy float in April/May raise.