High profits

July 1, 2015 09:00 AM

Philip Morris (PM) is near the top of the world’s leading drug companies. As global tobacco consumption slows, Big Tobacco has sought alternatives like cannabis. It’s the equivalent of Seagrams going after Molson. Tobacco and cannabis are part of a lifestyle fit in smoking. 
And one often leads to the other.

Big Tobacco also brings some much needed advantages, including:

  • Political lobbying strength
  • Ties to farmers
  • Familiarity with the market dynamics of cash crops
  • Existing infrastructure to scale production
  • National branding
  • Quality control methodologies
  • Experience extracting and mass producing key chemical components 

Regarding the last point, cannabis-laced food products already exist. Fritos is already the unofficial king of baked goods; forget sour cream potato chips, they probably have teams working up how to put pot in Pringles.

Big Tobacco has been studying the cannabis opportunity for decades. As part of the tobacco settlements a few years ago, millions of pages of documents were released by Philip Morris et al. that reveal this. According to a study done by the Center for Tobacco Control Research & Education, Philip Morris, Reynolds American (RAI), and British American Tobacco (BAT/BTI) since the 1970s have studied ways to affect decriminalization and legalization, considered combining cigarettes and cannabis and agreed that cannabis is not a threat to tobacco. 

The business potential was recognized quickly. Philip Morris underwrote a study that concluded:

“Marijuana smoking will have grown to immense proportions within a decade and will probably be legalized. The company that will bring out the first marijuana smoking devices, be it a cigarette or some other form, will capture the market and be in a better position than its competitors to satisfy the legal public demand for such products.”

Tobacco kills. That’s proven. Conversely, there are no meaningful studies that demonstrate cannabis is a health hazard. True or not, cannabis is perceived as healthier. In a 1976 memo to BAT, it was noted: ”If more restrictions are placed on tobacco and if the marijuana habit notches up further small advances in legality, many people may switch from one to the other in their search for a form of escape from our neurotic civilization. Marijuana supporters would claim that was a net improvement from the health aspect.” 

A key obstacle: The public had been taught that marijuana was morally bad. As BAT noted in 1980: ”At present the taking of many of these drugs is either medically prescribed or regarded as deviant behavior, but could be ‘socialized’ like alcoholic drinking and tobacco smoking.”

Cannabis Clubs are cute, but they aren’t the future of retail. We already have dedicated stores for selling alcohol. The novelty of cannabis will soon wear off, and with it the need for special restrictions. And while the local 7-11 begins to sell joints, you-know-who will be producing them. Not your small farmer but Big Tobacco. 

They have the capital, scale and market reach necessary to being a national market. They have experience getting mass quantities of a controlled substance into the hands of millions of stores and ensuring that taxes are collected and paid. They have been waiting for decades to do this.

The only thing stopping them is the current patchwork of legalization. If anyone has muscle and lobbying power at the Federal level, Big Tobacco does.

About the Author

Moneyball Economist Andrew Zatlin is a 20-year veteran of the semiconductor and networking world. His www.moneyballeconomics.com forecasts consistently rank at the top of Bloomberg polls and has harnessed the deep understanding of the way modern companies operate to find the key data points that predict which companies are likely to beat or miss their earnings. @MoneyballEcon