"2021 will be a year of transformative change particularly for the retail, hospitality, and cannabis industries in Canada."
Can you give us a sense of the restructuring or turnaround experience you've had?
My involvement in restructuring and turnaround has not been as an advisor but rather as an owner operator. I’ve been involved in turning around grocery stores, restaurants, and a public cannabis-sector company. Some were restructured by getting deeply involved in the operations, others by focusing on financial restructuring, and others by deal-making. The cannabis company operation, for example, was restructured and then combined with a synergistic company via a merger.
As someone who has worked a great deal in the Canadian retail sector, what kind of restructuring and turnaround do you see for that industry in the months ahead?
COVID-19 has been very hard on the bricks and mortar retail sector, but has been an incredible opportunity for online retailers. The customer acceptance of online shopping has been accelerated from normal trends with Amazon and Shopify leading the charge at either ends of the spectrum. Amazon for a one stop shop and Shopify for enabling small retailers to bring their products to market with their online retail platform. Companies that were not able to adapt in time will have lost critical December sales revenue and find themselves in a financial hole in Q1 of 2021. I envision 2021 will see the largest number of retail and hospitality company failures in history as many of these companies cannot withstand the financial burden of ongoing operating costs without the revenue needed to support them. The current government aid programs will not provide enough support to save many of the jobs in these industries. Unless new support programs are added, we will see major downward pressure on employment numbers and wages. Without the ability to collect contracted rental rates from distressed tenants, landlords will have to work with their tenants in many sectors to revise rental and lease terms to find mutually winning alternatives.
You've been involved in a turnaround of sorts in the cannabis sector. What lessons did that teach you that you would like to pass on to current Canadian cannabis operators (LPs, extractor, or retailers)?
I see the cannabis market splitting into 2 distinct pricing models, low price commodity and high quality craft cannabis. Companies that try to be all things to all people will have a hard road ahead with finite resources. A focused model that exceeds customers’ expectations will be key to winning the hearts, minds, and wallets of discerning customers. As new brands hit the market in the polarized high/low model, most middle-tier brands will be left with no choice but to compete on price where competition will weed out many of the weaker suppliers.
As someone who has traditionally waded in deep into the operations of those companies you've been asked to help, how critical do you believe it is that the person tasked with a restructure or turnaround have real operational experience in the industry? Is it every just spreadsheet strategy that wins the day?
Cannabis companies need to fill key roles in their organizations with people who have had leadership experience in consumer packaged goods companies. Alcohol, tobacco, and the grocery industry are very competitive, highly regulated, and full of very established operating models for a reason. The cannabis industry needs to follows those pathways to success.
Big picture: what do you see in your industries in terms of restructuring and/or turnaround in Canada this year?
2021 will be a year of transformative change particularly for the retail, hospitality, and cannabis industries in Canada. Retail will see added moves to omni-channel retail, where most bricks and mortar store cannot survive. Online sales will continue to outpace past trends in all age groups. New online formats, models, and marketplaces will become the new mall or farmers market. Local small retailers will have to be good at online sales and online community building or the customer will not find or stay with them. Mergers and acquisition will be used to drive dramatic improvement of ‘location economics’. Great locations with well-managed operating costs will win. Chains will no longer be able to carry weak or money-losing locations. Profitable store count will likely become the new key performance indicator vs total store count or top line sales.
Most restaurants, pubs, and fast food will need additional government aid programs to survive. The current support systems will not be enough to support the current business models. Ghost kitchens, with lower-cost models, will step in to fill the home delivery model which most restaurants, carrying high rental rates in costly locations, simply cannot sustain.
The cannabis sector will see a wide range of change. The largest public companies have already begun to right-size their operations and shed uneconomical assets. Sadly, many of the smaller public and private companies are facing the same pressures but appear reluctant to take proactive action, unable to right-size. Many, incorrectly, see restructuring as an admission of defeat rather than an insightful management decision. A refinancing – by equity or debt - might be the right model for many of these companies. While we’ve already seen some rush to M & A to save them from bad balance sheets, it will only do so in the long-term where 1+1=3. M&A must provide accretive value in a focused model to deliver the promised value. Brands that align with a particular customer segment will grow in value and become one of the key elements to overall company value creation. As the retail market evolves and moves to act more like traditional retail models, customers will exercise their choice and pick winners of stores and brands.
President Biden should have a positive effect on the North American market encouraging funds to flow back into the market. Nonetheless, the upside will be limited for Canadian companies (in all industries) who have largely failed in any attempt to cross the border to larger green pastures. There is little reason to think it will be different for cannabis. Canada had a head start with early legalization but unfortunately we did not turn that into a global advantage, but rather a massive over-investment into the wrong asset classes that are now liabilities to many companies.
While you’re clearly involved in a variety of ongoing projects, what do you look forward to most in your collaboration with the Restructur Advisor team?
As an entrepreneur I know low lonely it can be leading a company in tough times. I am looking forward to working with company leadership to save jobs, companies, and great ideas. Many find themselves leading the right company with the right idea, but at the wrong time or with the wrong balance sheet. Our team has a very diverse set of skills and background with a deep toolbox of options to help companies get back on track.