Newstrike Brands Could Benefit Substantially From Ontario Retail Privatization

Could Newstrike Brands Ltd (CVE:HIP) (OTCMKTS:NWKRF) (FRA:0N8) benefit substantially from Ontario’s decision to allow private retail sales of recreational marijuana once legalization arrives on October 17th? We put forward the protagonist case, in this deeply-editorial Saturday piece of Midas Letter content. Even we like to play armchair CEO every once in awhile.

For those that haven’t heard, a well-placed source told Big Media that Finance Minister Vic Fedeli and Attorney General Caroline Mulroney will announce as early as next week a plan to allow the private sector own and operate cannabis shops. Although the government would still control distribution and online sales, retail operators would presumably have free-reign to govern key operational details, such as inventorying, display (shelf visibility) and marketing (within the guidelines). We await next week’s official announcement for more details.

Under Kathleen Wynne’s since-deposed operating model, the Liquor Control Board of Ontario would have maintained a monopoly on dozens of stores under an LCBO subsidiary named the Ontario Cannabis Store (OCS). If the government does indeed follow the “Alberta model”, brick & mortar cannabis sales will be left completely in private hands.

That’s a significant win for the sector—especially brand-centric operators like Newstrike Brands.

How This Plays to Newstrike Brands Advantage

Even most non-investors know that Newstrike Brands has a unique marketing advantage versus all other LPs. From the company’s post-RTO inception on May 2017, Newstrike partnered-up and vested members of one of Canada’s most iconic bands—The Tragically Hip. The band made a small fortune during the CanniMed hi-jinx, and maintain close proximity to this day.

The company even employs two Hip agents on their Advisory Board—Bernie Breen and Patrick Sambrook—which could potentially unlock other artist branding opportunities in due course. Both are experienced and seasoned music industry vets.

With retail cannabis privatization reportedly coming to Ontario, one could easily imagine a potential marketing windfall playing right into Newstrike’s advantage; one that was never going to be unlocked under the old OCS model.

Newstrike Brands Ltd. CEO Jay Wilgar discusses the company’s rebranding strategies after the CanniMed Therapeutics Inc collapsed transaction (July 25, 2018)

Imagine a scenario where Newstrike invests a fraction of its massive $120 million cash hoard into self-operated retail outlets; say four each in Niagara Region, GTA and Kingston (Hip’s hometown) to start. Newstrike could then guarantee optimal shelf space and captivating auditory environment catering specifically to a core demographic base. Should Health Canada’s “lifestyle” advertising prohibitions allow, they might even be permitted to plaster Gord Downie’s face throughout store walls—in an innocuous way of course.

Next to the Tweed brand and Snoop Dogg, no other LP has that kind of artistic marketing pull within Canada.

Now let’s go one step further. Imagine a scenario where Newstrike doubles down and builds an impeccable, thoroughly-detailed Tragically Hip museum right on Lundy’s Lane! Something the modestly-sized and modestly-budgeted Hip museum in Kingston cannot match. Such a venue could attract hordes of visitors, including a sizable upstate New York fan base which listen to their fair share of Canadian radio. Just the gate alone might make millions annually—never mind actual cannabis sales.

They fly in the ointment is the rather onerous advertising restrictions imposed by Health Canada. The Cannabis Act strictly prohibits the promotion of cannabis, cannabis accessories or services related to cannabis. It covers such domains as testimonials/endorsements, depiction of people or characters, portraying lifestyle elements, and more. The restrictions are fairly comprehensive, and have served to corral Newstrike Brands marketing clout—for the most part.

But to my knowledge, there’s nothing in the rules that would explicitly prevent private retailers from playing non-cannabis related music in stores, to which Newstrike and Tragically Hip are inextricably identified. Newstrike has already announced that they will name certain cannabis strains after popular Tragically Hip songs. Talk about latent branding power on steroids.

And the best part? The above portrait I’ve painted wouldn’t be unduly capital intensive.

Case in point: It only cost National Access Cannabis Corp. 5 million convertible common share warrants (slightly below par value, five years out) to develop and operate a network of NAC-branded recreational cannabis outlets in Western Canada. The deal includes optionality to convert The Second’s Cup Ltd.‘s best real estate assets, which operate in several prime locations.

Final Thoughts

We’ll have to wait see what Newstrike Brands does—or doesn’t do—to capitalize on Ontario’s decision to go private. Would they partner-out and remain focused on their core business of growing cannabis? Or would they create a retail subsidiary which controls the whole seed-to-shelf pipeline? It’s hard to imagine a scenario where Newstrike stands pat and lets such an ideal branding/retail nexus twist in the wind. Even if band imagery is strictly off-limits, the auditory components would likely stand. I can’t recall TTP ever explicitly singing about cannabis on their soundtracks.

Whatever way you look at it, the company may finally be on the precipice of unlocking The Tragically Hip’s true marketing clout. One that would have been lost, or severely handicapped, under the previous government-controlled model.

For a company that’s been mercilessly beaten down like a rabid dog over the past seven month, this news is a potential godsend. One that may finally break the stock’s unrelenting downtrend as October’s legalization window fast approaches.

Original article: Newstrike Brands Could Benefit Substantially From Ontario Retail Privatization

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