Utilizing a strategy that puts a road-less-traveled philosophy into literal practice, Toronto-based Cannabis Xpress has placed its current 14 (soon to be 15) cannabis retail stores in less-populated areas of Ontario that other retailers have all but ignored. The build-them-where-they-ain’t gambit has thus far paid off, but it’s just one against-the-grain approach that CEO Chris Jones has employed in the rollout of the company he founded in 2020 after selling his interest in four profitable, first-to-market cannabis retail stores in the Ontario market and moving on from a stint at Origin House-slash-Cresco Labs. The latter experiences were not just stepping-stones for Jones, who spoke recently about his journey with Cannabis Business Executive, but essential influences that helped him conceive a way to stand out and make a successful business in Canada’s increasingly saturated cannabis marketplace.

Like many people, Jones was always interested in cannabis but when he was in his twenties there were not yet any jobs that interested him in Canada. By the time he was finishing up his MBA, however, opportunity knocked, and he made the leap directly into corporate cannabis.

“I accepted a job offer at a company called CannaRoyalty Corp., or CRZ,” he recalled of his first foray into the business. “I joined when there were only six of us in a little WeWork office in Toronto. It was a publicly traded company and we had investments in the US, particularly in California. After I graduated from my MBA program at McMaster University I continued working there, and because it was such a small company, you’re always wearing a lot of hats. It was a mix of doing due diligence on target companies that we either wanted to invest in or acquire, analyzing inbound and outbound opportunities as well as traveling to the US to negotiate with some of these companies and see their facilities. It was a great learning opportunity to join such a small team because I got exposure to the full cycle of a transaction from finding a company to closing the deal and integrating it into our ecosystem.”

When he started at CRZ in April 2018, its market cap was about $300 million, said Jones, but it grew significantly. “We bought about five companies when I was there, and invested in about six, and then we rebranded and changed our name to Origin House.”

Inevitably, a bigger fish came calling. “I was almost two and a half years at Origin House when we got acquired by Cresco Labs,” he added. “It was the largest U.S. cannabis transaction to date, at $1.1 billion at the time of annoucement.”

But other opportunities were also rearing their heads, including the chance to acquire his own licenses in markets that were just being developed. “I had looked at so many deals and saw how much money people were making, especially opening up early-on stores in a new market,” he said. “And I was familiar with the licensing process and the steps that were required generally.”

The stars were aligning. “I’ve always wanted to start my own business, but there was never the right opportunity or the right idea. So, it was a mix of wanting to branch off and do my own thing and feeling confident in all the deals and everything I’ve worked on up until that point, and then being in a good financial position where I could take a larger risk of starting my own business.”

When the moment came, Jones acted. “In Ontario, they had two lotteries for the first sets of licenses,” he recalled. “I didn’t win either of those lotteries, but I was following it very closely, and then the regulators announced they would be opening up applications on a first-come, first-served basis where anyone could apply. I began speaking to people I knew who would be interested in joining my team, and pitched them the idea of getting the licenses and then selling the business. Once I assembled the right team, I created the company, and submitted the first application that was required in Ontario and ended up being one of the first one hundred and fifty entities to receive the license. Then, two months later the second license type which was the location specific license application opened up, which required a physical address and a lease in place in order to proceed, I then applied for several locations.”

After he had locations selected, we needed to find the capital in order to execute on the business plan. “I had hundreds of phone calls, sent pitch decks to everyone I knew, and then finally found a publicly traded company interested in investing,” he said. “They had the rights to the name Star Buds in Canada, which was separate from the Star Buds that originally started in Colorado. We negotiated until we closed on almost a million-dollar investment into my numbered corporation, and I proceeded to open four very early stores in Ontario. They were among the first 150 stores to be licensed in the province, and they did really well, considering I had no previous retail experience (which likely ended up being an added benefit) and this was at the peak of the COVID pandemic.” When the stores were on track to do about $15 million in annualized revenue, and I ended up parting ways with my corporate job to focus on the retail business full-time because of how big the opportunity was.”

It took a mere ten months for opportunity to strike again. “The public company that put the money into the retail business at the beginning made me an offer to buy out my ownership, and it made sense,” said Jones. “I sold my ownership back to them and pretty much the next day I started Cannabis Xpress.”

Build, Sell, Repeat

There is clearly an M&A mindset at play. I asked Jones if he is building Cannabis Xpress for the long-term, or to sell, and how he financed it. “I had the cash from [the previous] sale and was able to increase my risk appetite in starting another chain of improved cannabis retail stores,” he said. “I raised some money from a small group of investors when we started Cannabis Xpress, and the plan was always to build and sell. It’s the same conversation I’m having now with people that have made us offers to buy the business, but I think it will be worth much more soon. But yes, the plan from the beginning was always to build and sell and then for me to start another business.”

Does that model still work in a credit-tight, margin-pinched economy? “I think it depends,” said Jones. “Not many cannabis companies are profitable now, and most are seeing declining revenues. Even with the public companies, it’s some sort of adjusted EBITA, and none of them have true net income, or even foreseeable net income. But we’re in a position where we do have net income, we are profitable, and we can continue growing off of cash flow. So, in terms of being in a bad position because of the markets generally, we’re not, because we don’t need to continually raise additional capital and dilute ourselves, so we’re in a good spot in that sense.

“On the flip side,” he continued, “if we are to sell the business, obviously cash is much harder to come by right now. So, to sell the business for cash makes it more challenging since it’s harder to come by and there is still major saturation in every license type in Canada, including retail, cultivation and manufacturing. It’s the same with many states in the US where they have an oversupply of cannabis, and too many stores all competing for the same customer base.”

But Jones is not ready to sell Cannabis Xpress, which zigs when everyone else zags. “Our stores aren’t in major cities where they’re saturated,” he said of one secret to the company’s success. “When people think about investing in or buying cannabis businesses, a lot of the news that you see nowadays is about mass layoffs, cultivation facilities shutting down, companies filing for CCAA, all the gloomy news that affects us even though it doesn’t affect us because we’re not in those cities and we’re not in saturated markets.”

Jones lives in a saturated city in Ontario. “I live in Toronto,” he said. “The business was started after the evolution of the market and the influx of stores into major cities that became saturated. I saw that a lot of smaller communities and towns didn’t have retail stores, which is where most of the Cannabis Xpress locations are. I believe it was because most people didn’t think they were attractive places to open up stores due to the low population, so the plan for this business was to focus on small to medium-sized towns. We have 14 operational stores in Ontario, and we have some of the smallest stores in Canada in terms of square footage, which allows us to have an extremely high revenue per square foot metric.”

He’s not kidding. “Our smallest store is 350 square feet, our second smallest is 353 square feet,” said Jones. “The amount of space in those two stores dedicated to customers are only about 80 square feet.” Not all of our stores are that small, of course, “but in some of the smaller towns you have a hard time finding anything under 800-square-feet.”

Location and square footage are not the only things that sets CANNABIS XPRESS apart from other retailers. “Another opportunity I saw generally with a lot of retail stores was that they just have too many products on the shelf,” noted Jones. “Some have 400, 500, 600 to 1,000+ unique SKUs, and that makes it difficult for staff to be fully educated on what they sell. It’s also a big cash outlay on inventory, and it slows internal processes down when doing inventory counts. And then on top of that, the products get stale, which leads to a reduced margin for retailers because of the steep discounts they have to put on the product to sell it.”

Cannabis Xpress offers far fewer options. “We have about 140 unique cannabis SKUs per store, which is a very limited amount compared to all other retailers,” said Jones. “And we keep our operational costs super low. We only have one person working at a time. Among the 14 stores right now, we have 41 employees total, including myself, so we have a very, very lean team.”

According to Jones, it’s a recipe for success in a market that is over-saturated but still expanding. “The success of this business has come from several core qualities,” he elaborated. “Picking locations where no one else is located – in a lot of the towns, we’re the only ones there – keeping operational costs low by not staffing a lot of people and having a limited product assortment that helps us by not putting up too much cash and not losing money discount products. And also having good relationships with the brands that we work with, so even though we have a limited product assortment, we still quickly turn our inventory and get new items in to keep customers excited. And then also keeping a really small corporate team. I wear every hat, we have one manager that oversees all stores, we have one person that does all of our ordering, and then everyone else’s position is within the store.”

Bigger Is Not Always Better

Like states in the US, provinces in Canada have their own individual regulations for cannabis. “Nothing in Ontario is fully vertical,” said Jones. “It’s just retail and then you have to buy from a government crown corporation, and there are additional restrictions of ownership. They don’t want other license type holders (aside from retail) to completely own retail stores in Ontario, so there are restrictions on how much they can own, which is capped at 25 percent.”

Because the Ontario Cannabis Store is the only distributor in the province of Ontario, all cannabis products have to be bought through them. “And you don’t get discounts on buying products in bulk, so if you have one store or seventy-five stores, you still have to pay the same price,” said Jones. “There are now over 2000 unique items you can order from our distributor via an online portal.”

Does the menu carry both large and small craft producers? “Definitely,” said Jones. “It’s usually easier to get products [on the menu] once you are a large producer, but they have their own process for what they bring in there, and they have different quarterly protocols.”

Currently, CANNABIS XPRESS has located its stores in places like Brampton, Scarborough, Hillsdale, Port Hope, Uxbridge, and Wingham, to name a few. They are all in Ontario. “I’ve been asked if I want to expand to different provinces, but because each province has a different licensing process, I’d have to clone myself or find the right partner out there to be successful in another province,” explained Jones. “And a lot of the other open market are also very saturated, like Alberta, Saskatchewan, and Manitoba, which had an influx of store upon licensing opening up.”

“I still believe that the biggest opportunity is in Ontario, which has the largest population for a province in Canada” he added. “But near the end of 2022, I learned that in New Brunswick, which not too far from Ontario, introduced a process to allow people to apply for retail licenses in 10 specific towns.”

“The only legal stores in New Brunswick are owned by a government crown corporation called Cannabis New Brunswick,” said Jones. “It’s a small province with less than a million people, although it’s a big landmass, and right now they have 25 government stores that are mostly in major cities. They hand-selected ten small towns to let people apply for licenses. I know from experience that opening a store in any limited-license market does well. You obviously have to control costs, but if you’re the only one in town, you pretty much do well, so I applied for all 10 of them, and we were notified that we won the rights to apply for licenses in our highest ranked towns. Due to the regulations, there is a cap of 30 percent ownership of the total number of private retail licenses in New Brunswick, so we are starting off by planning to open 3 stores there.

New Brunswick

Looking at a map, New Brunswick in general is the definition of remote, unless you live there. I wondered if the distance was a factor in pricing.” All licensed retailers pay the same price for products in Ontario, and New Brunswick will likely be the same way,” said Jones. “The distributor buys it from the producer, and then they add a markup, and then retailers are able to sell products for whatever we want. But our margins vary depending on the product category; some are lower than others, but we aim for about a 30 percent blended margin on products, and then it can decrease due to us having sales.”

New Brunswick offers another idiosyncrasy. “No one is allowed to actually make purchases online, so it’ll be a view-only menu in New Brunswick when we open up,” said Jones, who uses a service provider for his online menu which will be view-only for the new stores when they open.

Despite those restrictions, Jones is very excited about the New Brunswick market, especially because he will be the only game in town. “In any limited license market, and especially our situation in New Brunswick, once we open, we will likely be the only legal store in town forever,” he enthused. “I don’t think that they will allow for more licenses to be granted in these towns, unless the population increases by 1000 percent and we cannot satisfy demand, which is unlikely to happen.

“Consumption in the east is significantly higher than in Ontario,” he added. “From the reported sales data I’ve read from Cannabis New Brunswick, they sell approximately 3x more on a per capita basis than Ontario, so on paper it may not look like an attractive place to open a store, but in reality sales will be a lot higher than what most people would think.”

I was also curious how quickly he believes these new markets will ramp-up relative to his other locations. “We were cashflow positive consistently after only a few months from opening up our first store,” he said.  “The thing is, we open our stores very quickly. A lot of people take a year to open them up. I think we set a record for the fastest, where we opened our store in Scarborough five weeks from the date our lease started.”

The cost to open a store is also on the low side, per Jones. “We’re opening up stores for about $30,000 to 60,000, completely all in,” he said. “Depending on the size, the layouts are slightly different, but they all pretty much the same look on the inside – the same artwork, displays, fixtures, and signage,” he added. “Obviously, if it’s a little bit larger, we might have a more display units or whatever, but we open them up for significantly less than most people, and faster. Other cannabis retailers are spending hundreds of thousands of dollars, but we open them so quickly that they become cashflow positive in a shorter period of time, and  then the payback is a lot quicker as well.”

Making it Look Simple

I asked Jones if he also has a secret sauce for creating loyal customers. “If we’re in a town and we’re the only one there, obviously it’s easier because you’re not competing against anyone else,” he said. “But in terms of getting loyal repeat customers, it’s about having a convenient location, staff that are well trained and educated, as well as bringing in new products and having the same or lower prices than nearby stores.”

If he’s the only legal store in town, does that make the illicit market his only competition? “Yes, I strongly believe that everyone would rather buy a legal product from a store than from an unlicensed source,” he said. “If it’s tested, they know exactly what they’re getting, and if there’s ever a problem with the product, they can return it and know who manufactured it and when. When driving customers from making purchases from unlicensed sources to legal ones, it comes down to convenience, price, and the assortment of products available for purchase. Due to regulations, licensed retailers are limited to 10 milligrams of THC in an edible product, but a lot of people buy illegal 500 or 1000 milligram chocolate bars, which is an important reason why certain people have not diverted towards the legal stores. Since legalization in Canada, the statistics have shown that there are more legal sales than illegal sales, but it is still going to take more time before it gets close to being zero.”

Does meeting the needs of people in the smaller markets mean targeting new customers or staying close to experienced users? “Bringing new people in is always good,” said Jones, “but it’s like my parents. I could get them to buy a topical or tincture, and they would be considered a new user, but how much money do they really spend on cannabis? Not that much. The biggest spenders are the people that buy non-licensed products, due to the reasons above and in particular the amount of THC that the illegal products have. I think over time the regulations will change in terms of how much THC will be allowed in legal products, and then the larger spenders will convert over to making their purchases legally. We are slowly converting these people right now by having a good selection of products, low prices, having friendly staff and an inviting and safe atmosphere within the store.

“And the stores need to be convenient,” he added. “People don’t want to go out of their way to buy anything, so they need to be easily accessible. But yes, the biggest consumers are the people that are still buying products illegally versus new users. Going after new people is good for the industry, but what they spend annually isn’t that high compared to other people.”

I asked if they employ loyalty programs for just that purpose. “Yes,” said Jones.

Interestingly, branding of products in Canada is generally very different from the States, where there are more restrictions here versus the US. “The contrast between here and California is like night and day,” said Jones by way of example. “Our regulations are very strict in terms of marketing not just for the store but also for branded products doing any type of marketing or advertising. In the US, the brand will talk to the end consumer more than the retailer, but here it’s completely different. As a retailer in Canada, we have a lot of power when it comes to delivering that information and educating customers about the brand. We are the voice of the brand to the consumer, so we have a lot of power in terms of which brands we work with.

“But in terms of customers being attracted to certain brands,” he added, “we don’t really have that here. I’m sure there are some connoisseurs, the one percent, who know what their favorite brand is, but for the most part when people come into the store, they walk up to the person working there, and say, ‘What’s high in THC, can I get a pre roll, what’s on sale, I have pain and trouble sleeping, or I want a cheap vape pen.’ No one’s really asking for any specific branded products by name. They typically describe a feeling that they want to have, or just want something in that specific product category – like an edible gummy. There’s no brand loyalty here at all. Over time, I think it’ll change, but retailers are going to have a significant amount of power for a very long time in terms of delivering that message to the customers about the brands and the products.”

With its focus on sustainability, profitability, and growth, Cannabis Xpress would seem to be both a potential target of acquisition as well as an acquirer itself. “I’ve evaluated at least 200 stores for sale, and none of them would be accretive purchases, it usually comes down to sales being too low, and their operational costs and rent being too high, and they also want to get out the same amount of money that they put in – which is not going to happen,” said Jones of the M&A environment. “I go through their P&L and there’s just no way to bring them back to life; they are going to be losing money forever. I’d say pretty much 99 percent of what I have seen are stores that are never going to be able to reach a breakeven point or profitability, they have lost every month since opening and the owners do not know what to do.”

But there is one percent that is still viable. “There are a select few stores that I’ve been negotiating with recently to acquire,” he added. “These are some of the only ones I found in two years of getting inbounds that are actually making money. So, are we open to buying a store? Yes. But if I see stores that are on the fence and are close to making money, and then I look at the multiple that they want – there is usually there’s a big disconnect there, because I can open up a store in a month and a half for less than $50,000, beside them, which goes to the age-old build or buy dilemma.”

As far as the United States goes, Jones is tempted but not willing to bite just yet. “I get presented with many opportunities every day, and although many of them are exciting, it can take your focus away from the actual business,” he said. “I think one of the main reasons why we’ve been successful and profitable is because we’re focused on one thing only. In terms of expanding, New Brunswick was interesting because it’s a limited-license market and I’m going to be the only one there forever. So, it makes sense to apply and to open up stores there, but in terms of expanding to the US, I’ve thought about it, but with me living in Toronto, the biggest opportunity is opening up stores here in Ontario and New Brunswick, and then maybe some other provinces that have a limited license application system. It would be a great accomplishment to expand our Cannabis Xpress empire to the US and open up a store, but that also comes with a new set of regulations and setting up the infrastructure and team again, so my time right now is better spent growing the business domestically.”

In terms of other provinces, I will likely only be looking at systems that are limited license and not completely open for new expansion opportunities within Canada,” said Jones, “so it’s probably just going to be here, New Brunswick, and then maybe expanding further east. All the other provinces are either completely government crown corporation run, like Quebec, or their open markets, and a lot of them are pretty saturated and not attractive to enter at this stage.”

In his strategy and his demeanor, which is laid-back, Jones somehow makes it look easy, which I noted to him. “It’s just keeping it simple and just being very financially disciplined,” he retorted. “A lot of people don’t have financial discipline, and their corporate teams are too big. I spoke to a retailer a couple nights ago, and he was asking me for advice on how to help his store. Then he introduced me to his CFO, and I replied, ‘Your CFO? How many stores do you have?’ And he said, one. And then another person comes over, and he happened to be the single store’s  head of marketing. I was thinking to myself, this is ridiculous. You’re going to have to terminate all of your friends that you hired for roles that you do not currently need.

“I wear all those hats, and look how many stores we have,” he added. “It just doesn’t make any sense. So, having strong financial discipline, keeping everything as simple as possible, and picking the right locations – that’s what has made us successful. But we’re probably in the one percent of profitable retailers in Canada. From what I’ve seen, of all the public companies none of them have positive net income. I’m sure there are private ones that that do, but it’s more challenging to see their financials because they are not publicly disclosed.”

The future remains malleable for Jones and the company despite his firm grip on his business. “In terms of expanding outside Canada with our retail brand,” he said, “I am interested in that, but it is unlikely to happen in the near future.  If the right partner came along who wanted to invest or acquire us and roll out our concept in the US or abroad – that would be an interesting conversation to have. I’m better off focusing on where we’ve been successful here. And in terms of our future and our expansion in Canada, it’s opening up more stores either in Ontario, New Brunswick, or another limited-license province, and then selling the business eventually.”

As far as the cannabis industry goes, Jones is a lifer. “It’s in my blood, and I love it,” he said. “I think it’s a unique industry with a lot of challenges, which creates opportunities for businesses like mine. It’s probably one of the most difficult industries to be in right now, due to the high level of regulation, and extreme competitiveness, but I thrive off of the challenge and complexity of it all. I also think cannabis is a great industry in terms of young entrepreneurs starting businesses. I’m definitely going to be in this industry in some form or another for my entire life. If not this company, it’ll be another, but I’m definitely in it for the long run.”