Tobacco consumption has been steadily declining around the world, according to the data of multiple research centres. Whether it’s strict tobacco laws or positive encouragement working, the figures speak for themselves: cigarette sales volumes in the U.S. are dropping by at least 5% annually; in England, people smoke 1.4 billion fewer cigarettes per year.
Naturally, this hasn’t been unnoticed by major tobacco players, whose products are becoming less popular in the Western world on the massive wave of healthy lifestyle adoption. Many of them, alongside with alcohol producers, are keeping an eye on cannabis, considering it as a logical extension of their core business – and potentially a significant part of their future profits.
This article takes a closer look at the way big tobacco companies have been approaching cannabis businesses and making (or not) their investment decisions, as well as how these seem to turn out for them by far.
In December 2018, the U.S. tobacco giant behind Marlboro invested $1,8 billion for a 45% stake in Canadian cannabis producer Cronos Group – undoubtedly, in a serious bet on marijuana to make up for its slowing cigarette sales, which resulted in a 25% fall in Altria stocks in 2018 only. Cronos saw this acquisition as a boost for the international distribution growth and increasing investments in R&D inside the company.
Interestingly, as another move on its asset diversification strategy, in the same month Altria made a $12,8 billion investment in Juul Labs – a major vape company that covers about 70% of the whole e-cig market, especially popular with teens. Things have taken an unexpected turn since then: in spring over 500 people were hospitalized in the U.S. with serious lung injuries presumably connected with vaping, resulting in 7 deaths and a massive crackdown on e-cigarette business. While the investigation is being lead to figure the case out, Altria has already lost $31 billion in its valuation since April.
Cronos also saw a decrease in its stock price, as vape pens for cannabis are its core focus. However, Cronos produces a variety of other hemp and CBD-based products, also actively looking at cannabis-infused beverages now, which many consider a potentially huge market. Altria’s owning a beverages business could really help with that.
Will its investment in cannabis help Altria to make up for the vaping scandal and declining tobacco sales? Time will show.
Not everyone seems as willing to place their bets on cannabis. Following Altria’s investment in Cronos, in January 2019 CEO of Philip Morris International made a statement that cannabis space is still too risky for it to follow the steps of its competitor tobacco producer and make a substantial investment.
However, Philip Morris has no illusions regarding the future of cigarette business. The corporation has stated multiple times that at some point it would like to seize traditional cigarette sales. Its main hope now lies on iQOS electronic cigarettes with tobacco heating technology that is considered to be less harmful for health.
Thus, Philip Morris refrain from stepping into cannabis business might show it determination to make iQOS a globally accepted product, not getting distracted by a completely new brand. The company’s CEO also mentioned potential logistical hurdles connected with regulatory approaches towards cannabis in some countries, which may be harmful for its core business
As another interesting factor, Altria and Philip Morris were leading a conversation to reunite, which would become a colossal $200 billion-worth merger, and joined forces in all businesses – which also includes marijuana. However, just last week, on 25th September 2019 tobacco giants reportedly ended their discussions, and the merger does not seem to happen.
So it look like Philip Morris has to further figure out its policy towards cannabis on its own.
The recent motto of this British multinational tobacco corporation goes: “From tobacco to something better”. Does something better go for marijuana?
Back in mid 2018 Imperial Brands made an investment in a medical cannabis company Oxford Cannabinoid Technologies (OCT) that researches and designs cannabinoid-based treatments, in a move to better understand the market and cannabis potential.
As its latest investment, in July 2019 Imperial also made a step into Canadian marijuana business, signing a $123 million investment and R&D deal with Auxly Cannabis. This deal followed Imperial’s May move, dropping its dividend target to be able to invest in cigarette alternatives, which include coffee and marijuana.
Tobacco companies are not the only ones to have an eye on cannabis: several major alcohol producer have also been keeping up with the trend.
In August 2018 Corona beer maker Constellation Brands increased its stake in cannabis production company Canopy Growth to 38% with a 4 billion dollar investment. The top management of the company highlighted their belief in tremendous growth potential of the cannabis industry, especially cannabis infused beverages as the new socialization drink.
It was a winning bet: less than a year later Constellation’s investment in Canopy gained $1.7 billion, as the company’s stock went up 70% in price.
Molson Coors Brewing
Around the same time, when Constellation’s investment boosted financial activity on the cannabis-related market, another large alcohol player entered a deal to secure its share of the market. Molson Coors’s Canadian branch teamed up with HEXO, a Canadian cannabis producer to develop its own cannabis-infused beverages in Canada.
Molson Coors repeatedly expressed concerns that the growing market of legal marijuana can negatively affect their sales and profits. They are not alone: a group of 50 Canadian beer makers asked the government to introduce higher taxes for cannabis industry.
The beer taxes and prices are higher in Canada than in the U.S., which makes this business more vulnerable in the competition with the rising cannabis market.
In the context of rising health and sustainability consciousness around the world, the cannabis industry is becoming a serious competitor for tobacco and, in a longer perspective, alcohol businesses. Traditional players are responding to competition either by focusing on other products (like e-cigarettes) or trying to enter the new cannabis market themselves through acquisitions. The interest from big players further drives the value of the industry and its investment attractiveness, as well as creates additional exit opportunities for early investors.
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CEO at Stobox. Serial entrepreneur. Investor. 25+ years in IT Development and entrepreneurial experience. International background. Focus on technologies, stocks and crypto trading platforms, Web 3.0.