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Could Big Tobacco Become Big Cannabis As Marijuana Business Soars?

April 20,2018 13:11

One place where none of this is a problem, at least right now, is the rapidly growing, quasi-legal marijuana business. More users, perhaps accepting that they don't enjoy coughing or pot smoke's armpit-spice smell, are turning to vaping devices. Some ...and more »

A day before April 20, when a dome of pot fumes will account for approximately 90% of the smog over Los Angeles and its hot marijuana business, Big Tobacco stocks giants Altria Group (MO), sister firm Philip Morris International (PM) and British American Tobacco (BTI) tanked on fresh signs of declining demand.
The reason was that Philip Morris, which sells outside the U.S., fell short of Q1 sales expectations, amid an ongoing consumer flight from cigarettes in most of the world. Weaker-than-anticipated demand for reduced-risk devices that aren't cigarettes, particularly in Japan, also hurt.
One place where none of this is a problem, at least right now, is the rapidly growing, quasi-legal marijuana business. More users, perhaps accepting that they don't enjoy coughing or pot smoke's armpit-spice smell, are turning to vaping devices. Some analysts say that trend could be an opportunity for firms like Altria and Turning Point Brands (TPB), which owns rolling-paper-maker Zig Zag and two vaping companies.
"Vaping is one of the fastest-growing segments in both nicotine and cannabis," Cowen analyst Vivien Azer said in 2016. "Upon federal legalization, Big Tobacco could leverage its expertise to explore the legal cannabis market through vapor."
She estimated then that Big Tobacco companies could nearly double their underlying growth via cannabis. Overall, assuming full legalization, Big Tobacco could scoop up around a fifth of the overall share of the marijuana business by 2036, she said in a report then.
The marijuana delivery platform Eaze said last year that ready-to-use products, which include vaping devices, for the first time made up a greater portion of its sales than "flower," the industry's term for buds. Vaporizers in November and December made up a greater percentage of sales than dry, loose buds, according to data from the company, which operates in California. 
"Not a lot of people know how to roll a joint, or they don't have the paraphernalia to consume the flower," Sheena Shiravi, Eaze's director of communications. "So (with) prerolls, they can just consume flower, or even better, a vaporizer."
Marijuana Business An 'Exciting Opportunity'

Vaping products on display at Med Men. (Elaine Low/IBD)Even so, people do, in fact, still roll joints. Turning Point Brands said in March that "there will be a whole new audience of consumers" of people rolling their own in Canada, where recreational pot legalization kicks in this year. Turning Point Brands at that time said it widened its offering of its Zig Zag Orange and King-Size Slim rolling papers in Canada, and that its partners were "exploring additional opportunity products" beyond this year.
At a conference in January, Turning Point Brands CEO Larry Wexler said that it saw the marijuana business as an "exciting opportunity" that it was still trying to understand.
He added: "I suspect that there probably are some people who buy our products that were intended for tobacco — my lawyer's sitting here — intended for tobacco and they go off and they credibly use it for other products."
Even as it remains enthusiastic about the marijuana business, Turning Point Brands said in January that it had no plans for any prerolled products. Azer suggested that tobacco companies pushing lower-health-risk products might not want the extra glare from regulators that could come with trying to sell their own joints.
"The tobacco industry is highly scrutinized and highly regulated," she said. "And that's true in the U.S. and it's true globally as well. Right now, one of the key priorities for global tobacco companies are their reduced-risk product platforms."
Pesticide Worries For Marijuana Business
The marijuana business, however, has its own big health problems. In California, new cannabis industry regulations on pesticides take hold in July. Those rules have raised fears that the vast majority of the pot sold via dispensaries would come up short, choking off supply and pushing prices higher. The changes would likely favor the state's small portion of licensed, deeper-pocketed pot growers.
Despite the marijuana industry's rebranding efforts — the rustic-chic packaging and the chipper, minimalist startup logos — a lot of pot is still loaded with chemicals that are bad for you, a Rolling Stone article from March notes. That story also notes that because marijuana is illegal on a federal level, the EPA hasn't approved or rejected what pesticides to use for pot the way it does for other plants.
Quiet Moves By Big Tobacco
Meanwhile, other tobacco companies have made quieter moves that may, or may not, signal interest in the marijuana business.
Philip Morris International planned to invest roughly $20 million in Syqe Medical, an Israeli company that makes a cannabis inhaler, according to reports in 2016. Syqe "will develop technologies for Phillip Morris that will help reduce health risks associated with smoking," Reuters said, citing the Israeli news outlet Calcalist.
Philip Morris declined to provide any extra information beyond existing press accounts. The overseas Big Tobacco firm said it "has no plans to develop or commercialize cannabis products." Similarly, Altria, which owns Philip Morris USA and spun off Philip Morris International a decade ago, said "Marijuana remains illegal under federal law and Altria's companies have no plans to sell marijuana-based products."

(Elaine Low/IBD)Imperial Brands (IMBBY), the U.K. company that owns cigarettes like Winston and Kool, last year appointed Simon Langelier to its board. Langelier is a 30-year Philip Morris International veteran who is also chairman of a medical cannabis company. Imperial, in a release, cited his experience in "wider consumer adjacencies."
When asked about how Imperial was viewing the cannabis market, Simon Evans, a spokesman for the company, said it is "tracking developments in what is a fast-growing segment."
Evans stressed that Langelier's experience at Philip Morris was the main reason for his appointment. But Evans indicated his cannabis industry experience wasn't just an afterthought. "So, is it irrelevant? No. It's not," he said.  
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