Second Cup joins marijuana rush with plan to convert some coffee shops to dispensaries

Shares of coffee retailer the Second Cup Ltd. soared nearly 30 per cent Thursday, after the company announced plans to turn some of its coffee shops into recreational marijuana dispensaries.

The second-largest specialty coffee chain in Canada, which has struggled to stay competitive in recent years, said on Thursday that it is partnering with National Access Cannabis, a marijuana retail and dispensary company.

The deal will see NAC and Second Cup jointly apply for dispensary licenses for a number of Second Cup stores in Western Canada, where private recreational marijuana retail will be allowed later this year. The companies will begin with around 20 stores in Alberta.

“I would describe it as opportunistic, because it’s never been expressed as part of the Second Cup corporate strategy,” said Michael Bregman, Second Cup chairman. “This is really a separate opportunity to see if we can capitalize on the real estate.”

If the properties are granted marijuana retail licenses, NAC will rebrand the stores and operate them. The long-term leases will remain with Second Cup, and the two companies will split dispensary ownership 50/50, with franchisees taking a portion of Second Cup’s earnings, said Bregman.  

“Let’s say there’s a Second Cup store doing $750,000 a year…. That’s OK, it will be profitable for everybody, for Second Cup and the franchisee,” said Bregman. “But let’s say there’s an opportunity to transform it into a dispensary that might do $5 million out of the same space … we’d be crazy not to take a look at that opportunity.” 

Second Cup’s marijuana move — which is only a small part of its overall strategy, according to Bregman — is the latest in a string of attempts to turn the struggling company around, including everything from store redesigns to management shuffles.

“I think the company grew a little bit complacent, innovation died down, and the relationships with the franchisees, which are so critical to the company’s success, deteriorated,” said Bregman, who helped build the company and returned to it 2013, having previously sold it in 2002.

“Make no mistake, the company is a lot better than it was the last year or before, but we’ve got a long way to go to get to where we’re going to be satisfied,” he added.

Bregman says the company was approached by a number of marijuana companies in recent months. The seed, however, may have been sown last spring when Michael and Aaron Serruya, the entrepreneurs behind brands like Yogen Fruz and Pinkberry, gave the company an $8 million loan. This was later converted into shares, giving the Serruya brothers a significant stake in Second Cup.

The Serruyas are also heavy investors in the cannabis space, as early backers of Aphria Inc., now the third-largest licensed cannabis company in the country, and major investors in a number of smaller cannabis companies within Aphria’s orbit.

“They were central figures in making this deal happen,” said Mark Golinger, CEO of NAC, which is working on a supply deal with Aphria and has an existing supply agreement with CannaRoyalty Corp., an Aphria investee.

For NAC, which is backed by cannabis industry insider Chuck Rifici and former Ottawa Redblacks co-owner Jeff Hunt, the deal gives the company access to valuable real estate in Western Canada.

Where it becomes really interesting, said Golinger, is if marijuana consumption lounges become legal in Ontario, a possibility that has been hinted at by both the provincial government and the opposition, although not for the first year of recreational legalization.

“They do have quite a few stores in Ontario, which is great if the Conservatives come in and do as they say. Either way I think that consumption lounges will become a reality, and there’s a lot of assets here that (Second Cup has) that would be perfect for conversion,” said Golinger.

As far as Bregman is concerned, Ontario cannabis lounges are a long way away, as is the possibility of selling Second Cup-branded cannabis brownies or drinks. But partnering with NAC gives Second Cup a toehold in the cannabis space.

“What we see here, and the Serruyas have certainly educated me here, is an emerging market that’s going to be very exciting, but nobody knows what it’s going to look like,” Bregman said. “What we love about it as a board, is we can see the potential for very material upside, but there’s no particular financial risk here.”

As part of the deal Second Cup took 5 million NAC warrants that can be exercised at $0.91.

NAC stock closed up 9 per cent on Thursday at $1.00. Second Cup shares closed at $3.54, up about 29 per cent.