Marijuana And Big Tobacco: Not That Scary

Sir Walter Raleigh
Sir Walter Raleigh

I just read an interesting and thoughtful investment article on Seeking Alpha, an investment website. The article is entitled 2016 Could Be The Tipping Point For Full Marijuana With Big Tobacco Poised To Strike and though it gets a lot right about the marijuana industry, it also makes some very common wrong assumptions about it as well.

Its thesis is that 2016 is going to be a tipping point year for marijuana and on that I agree.  It starts out with the following “summary”:

  • 2014 went 3 for 3 for recreational marijuana legalization, with Oregon, Alaska, and DC all voting easily in favor.
  • 2016 will see 7 more state referenda for legalization, with California being the most consequential.
  • If 2016 is as successful as 2014, 25% of the US population will no longer be living under marijuana prohibition.
  • National polls continue to show a majority supporting full legalization.
  • The tipping point is close, and once the Federal government acts, Big Tobacco will come in big to try and reverse stagnant earnings.

If only it were all this easy. First off, this article ignores the many states that continue to vote against legalization, either through their legislative bodies or through popular vote. Florida immediately springs to mind. Yes, Florida was voting on medical marijuana, but if it could not legalize medical cannabis, it is not likely to legalize recreational cannabis. Second, California is anything but a slam-dunk for 2016. There are just too many competing factions there for anyone to put that vote in the bag. Will those factions work together for the common good in 2016? Indications for 2016 are that they will, but its past history seems to dictate against that.

Lastly, the tipping point for federal legalization is not necessarily so close. Hilary Clinton is likely to be the Democratic nominee and her corruption issues may scuttle her becoming president. Even if she does become president, she is less pro-pot than President Obama, who can probably best be described as neutral on the issue. What if someone like Chris Christie or Marco Rubio ends up becoming our next president? We could actually see retractions of federal liberalization on either of their watches. For more on this, check out Marijuana And The Presidential Election: Where Do They Stand?

Even with a pro-pot President, we are not as close to a federal legalization tipping point as the writer of this article believes. Gay marriage is many years ahead of recreational marijuana both in terms of state and popular acceptance and yet we still do not have a federal law making it legal nationwide. We may soon be getting a Supreme Court ruling making that a reality, but that only further proves the point on marijuana: our politicians rarely get out in front of big social issues and their failure to do so on gay marriage is  requiring Supreme Court “intervention.” There will be no such Supreme Court intervention for legalizing recreational marijuana because usage of recreational marijuana — unlike gay marriage — is almost certainly not a fundamental civil right.  Unless our elected federal representatives vote for legalization, federal legalization is not likely to happen and such a vote is not likely to happen for many many years, even if we do get a pro-pot president.

Now let’s talk about Big Tobacco and marijuana. The author argues that legalization in California will be huge. On that we agree. California’s population is about seven times that of Colorado and its GDP is about ten times. So yes, legalization in California will lead to a massive increase in revenues for marijuana businesses. But legalization in California will not mean the state goes from no cannabis to massive cannabis. Even though recreational marijuana is not yet fully legal in California, there is no shortage of cannabis companies (both those that grow and sell marijuana and the ancillary businesses that supply the industry) making large profits from sales to and within California. It is not clear whether this article is positing Big Tobacco getting into marijuana upon legalization in California or only upon legalization nationwide:

If legalization succeeds in 2016, with the most important state obviously being California, the investment landscape will be almost farcical, with microcaps with little capital the only outfits trying to supply a multibillion dollar industry. The biotechs at the top of the marijuana index have little to nothing to do with recreational supply and sales, though they would certainly benefit from strictly medical legalization. So then what to do?

If full recreational legalization passes, what we are likely to see are big interests like Big Tobacco coming on to the scene. Though this has not happened yet within the restricted realm of legalization we have seen so far, and no public statements about intent have been made, there is evidence from internal documents that upon full Federal legalization, Big Tobacco will make a move.

Unfortunately, we see almost no chance of federal legalization in 2016. Note also that even when federal legalization occurs, it will almost certainly not mean that all states must allow recreational marijuana, only that the federal government will have no problem if they do. I do not see Big Tobacco getting into the marijuana industry unless and until marijuana is legal on the federal level. The author of this article and I agree on this. We wrote about this earlier this year in Big Tobacco Won’t Be Big Marijuana (Yet):

Big Tobacco will not pull the trigger on marijuana until federal laws change and such a change is at least 3-5 years off. Congress is not likely to legalize marijuana federally until at least half of the states have themselves done so. Until that time there is just no way Big Tobacco investors will bet their financial lives on relatively unprofitable and federally illegal marijuana ventures.

Even if Big Tobacco wanted to get into marijuana markets right now, they would have trouble due to the various states’ tough restrictions on who can and cannot participate in the cannabis industry. Barriers to entry like residency requirements, investment caps, and actual industry experience would all work to keep out almost anyone from Big Tobacco. I also question how many cannabis medical patients would purchase marijuana for medical use from an entity associated with or backed by Big Tobacco. The same holds true for recreational users, though probably to a somewhat lesser extent.

Most importantly, I have faith that before Big Tobacco seriously considers jumping into marijuana, the moms and pops of the cannabis world will have expanded and become stronger despite federal prohibition. More and more individuals with serious business acumen are getting into the industry and their willingness to risk it all in the face of federal raids and asset forfeitures will give them all sorts of operational and branding advantages over Big Tobacco when it comes to brand recognition and advanced product development. Though I do not dispute that Big Tobacco will eventually make its way into the marijuana industry in some shape or form, it will not be anytime soon and the small marijuana businesses you see today will do just fine when that time eventually comes.

It is just wrong to assume that once federal legalization happens big tobacco will dominate the industry. We see big and small companies thriving in the marijuana industry of the future, just as they do in the alcohol industry of today. We see most of the big cannabis companies of the future coming from the well run cannabis companies of today that have built up their brand and deftly navigated various states through licensing and other legal means. For more on this check out Take Your Marijuana Business Nationwide With Brand Licensing. Our cannabis business lawyers represent plenty of such businesses in various aspects of the industry and we see more such companies all the time. These companies will have at least a five year head start on Big Tobacco in terms of figuring out the marijuana industry and in building up a marijuana brand name and a marijuana trained work force. Big non-cannabis companies, including Big Tobacco and maybe Big Pharma and Big Alcohol, will eventually get into the marijuana industry, but they are just not going to be as well equipped to dominate as the author of this Seeking Alpha article would have us believe and they are just not that big a threat.

Do you agree?