Ontario pot shop sales data breach could shift competition in market, alter confidence in OCS

A Ontario Cannabis Store website pictured on a mobile phone, in Ottawa, Thursday, Oct. 18, 2018. The OCS, which distributes marijuana crafted by licensed producers to retailers, said Tuesday that Ontario Provincial Police are investigating after some of its sales data was “misappropriated.” THE CANADIAN PRESS/Sean Kilpatrick

By Tara Deschamps, The Canadian Press

A recent breach of Ontario cannabis store sales data could shake up competition among pot shops and negatively impact retailers’ confidence in the province’s pot distributor, say industry observers.

The Ontario Cannabis Store, which distributes marijuana crafted by licensed producers to retailers, said Tuesday that Ontario Provincial Police are investigating after some of its sales data was “misappropriated.”

OPP spokesperson Bill Dickson confirmed the investigation Wednesday.

The OCS, a Crown agency, has said the incident was “no failure of IT security or systems” and a May 10 letter sent to retailers by the OCS and obtained by The Canadian Press said the data was “misappropriated, disclosed, and distributed unlawfully” and is now circulating in the industry.

The affected data includes the revenue, number of kilograms of cannabis sold, total units sold and sell-through rates for individual stores in Ontario, along with the store names, license numbers and whether they are owned independently, by a corporation or by a franchisee, three sources say. The Canadian Press is not identifying the sources because they were not authorized to share the data’s contents.

The OCS didn’t immediately provide a comment.

Members of the industry say the data’s release is concerning because sales numbers are typically confidential and when revealed to rivals, could endanger their business.

Such data “provides a lot of really competitive insight into who’s doing what, who’s moving what, which retailers are selling what,” said Deepak Anand, founder of cannabis company Materia.

“That certainly could be a leg up and give a leg up to competition within the industry that’s looking to get ahead of the next person.”

Anand said the most damaging aspect of the breach for retailers is their sales volumes being publicized, because other licensed cannabis producers could use that information to target shops that are selling the most, leaving others to languish.

The timing also exacerbates the effects of the breach.

The number of pot shops in Ontario soared to 1,333 in recent months, up from 1,115 at the end of September. The growth has stiffened competition in the market and pushed companies to market heavily so they can secure as many customers as possible — a tough feat when the illicit market is still strong.

“Any kind of minor advantage in the market is really, really critical,” said Jaclynn Pehota, executive director of the Association of Canadian Cannabis Retailers.

If people can tell from the data which stores are performing best they can study those businesses, try to “crack their formulas” for success and then duplicate the model at their own store, which would “really damage any competitive advantage,” she said.

“If you’re in a position where everyone else around you is struggling and you’re on the path to profitability, that’s very critical and your intellectual property has now been to some extent exposed,” she said.

Ontario has been rife with complaints of too many cannabis stores for years and some analysts and industry members are predicting not all pot shops will survive.

The proliferation of stores in Ontario neighbourhoods like Toronto’s Queen Street West is so intense that several Toronto city councillors filed a November motion for a moratorium on new cannabis store licences lasting a year or until a provincial bill giving municipalities a say in the location and distribution of private cannabis stores passes. City council amended the motion to remove the moratorium request.

Data being released in that kind of environment puts owners in a “vulnerable” position, if they are trying to negotiate a sale of their business, said Lisa Campbell, chief executive at cannabis marketing company Mercari Agency.

“If stores are looking to be acquired, and things are not going well, it could be a death sentence for many Ontario retailers,” she said.

Aside from the business consequences of the breach, Pehota feels the incident will impact the trust retailers have in the OCS.

“I don’t want to put words in the mouths of the license holders in Ontario, but I would be very surprised if this didn’t have a negative impact on their perception of the safety of their data,” she said.

“It’s inevitable that this kind of thing will damage the confidence of people who are trusting government with their business data.”

In the wake of the breach, the OCS said in its letter to retailers that it quickly launched an investigation to identify the source, restricted access to internal data reports and notified the police.