By Barbara Pastori, Prohibition Partners.
A few weeks ago, Philip morris (NYSE: PM) CEO Jacek Olczak made the news with a series of seemingly counterintuitive remarks. Namely, the tobacco giant may soon stop selling cigarettes in the UK, while urging the government to ban smoking altogether. Olczak said the Marlboro brand “will disappear” and that “the first choice for consumers is to quit smoking“.
While this may seem like a deliberately provocative position – to some extent – it also broadly aligns with the direction the tobacco industry has taken in recent years. It can also turn out to be a sound business strategy. Most sustainable businesses have to reinvent themselves at some point in order to survive.
Technological developments are a common driver of change, but the pressure can also come from broader changes in consumer behavior. It is more difficult, for example, to find a company that is still selling the same product after more than 100 years than it is to find a company that has successfully changed industries. In some cases, the best way to protect shareholders’ interests is to imagine different approaches and embrace change, rather than drifting comfortably on a sinking ship.
Tobacco and cannabis: a perfect marriage
The global exodus of consumers from the tobacco market means that the industry is now at a turning point, where alternative or additional product lines are vital for the future safety of its businesses. Of the many alternatives that the tobacco industry is exploring as part of its vast reimagining of its future, cannabis certainly represents an opportunity. Many tobacco companies have already invested in the cannabis industry in recent years, including Altria, Imperial marks (OTC: IMBBY), and more recently British American Tobacco (NYSE: BTI).
But why does cannabis seem particularly attractive to Big Tobacco? The first association that comes to mind is smoking, but there is much more to the story. Here are some key points that I think make cannabis a particularly compelling case for tobacco companies.
1. Technological advances
The two industries have shared the benefits of certain technological advances. Whenever a breakthrough is made to make it easier to consume burnt organics in a safer and more efficient manner – as is the case with vaporization and e-liquids – both industries stand to gain.
2. Miscellaneous products
The interest of Big Tobacco may also extend far beyond the products to be smoked. Investments are still at an early stage but, from our perspective, we are seeing interest in products from the full range of cannabis. Tobacco seeks to offer consumers an alternative to tobacco; the evolution of the cannabis industry, which has brought a wide variety of products to market – such as edibles, oils and topicals – can serve as a point of reference. At Prohibition Partners, we notice a growing interest in these alternatives. This is quite remarkable for an industry that for so many decades thrived with a relatively limited product line.
3. Production process
Cannabis and tobacco are based on similar production processes, i.e. the cultivation of a warm climate crop and its further processing. This explains the interest in cannabis in countries such as Andorra and Malawi, which in the past relied heavily on the cultivation of tobacco as the main agricultural product.
4. Supply chain and distribution
The two industries share similar distribution channels, as products are typically sold through physical stores, which sell regulated products, such as tobacconists, non-licensed, and dispensaries. In all these points of sale, traders need specific permits and are subject to strict codes of conduct.
Likewise, the marketing of cannabis and tobacco products is severely restricted, as countries and states have specific rules on location (i.e. print, radio, digital communications, television) and how (ie. So by having previous experience with heavily regulated products, it would be fairly easy for Big Tobacco to make the transition to the retail cannabis market.
5. Marketing opportunities
Investing in cannabis could also be a huge marketing opportunity for tobacco brands. After all, fundamental product differentiation in the tobacco industry is weak, so fortunes have been built mostly on iconic advertising. However, in recent years, regulatory repression and changes in consumer perception have made it increasingly difficult to promote tobacco brands. Investing in cannabis would not only be a way to spend a marketing budget in a less regulated environment, but simply pairing it with cannabis could help the industry improve its reputation in certain key strategic segments of its target audience, especially among youth.
6. Highly regulated markets
The tobacco industry knows how to operate in a complex and highly regulated environment. For this reason, he was forced to develop strong PR and lobbying skills – by applying this influence to cannabis, tobacco could have a significant impact on shaping a still nascent regulatory framework. Altria’s activism in the United States is a clear example.
7. ESG rating and sustainability
Finally, a transition to the cannabis market has its benefits for listed tobacco companies as it would allow them to improve their environmental, social and corporate governance (ESG) ratings. ESG ratings have become increasingly important to publicly traded companies, as investors and analysts take these ratings into account when determining the long-term risk of a company’s shares. Adding products like CBD from outdoor-grown hemp (a carbon-negative crop) to their lineup could improve Big Tobacco’s ESG ratings and allow them to participate in the evolution of the emerging industry. towards more positive environmental and social results.
Invest for the long term
When you consider all of these factors together, the relationship between tobacco and cannabis could become more than just a marriage of convenience. Tobacco companies have many of the skills and resources required to succeed in the cannabis world, while cannabis manufacturers have overseen a process of transformative innovation that the tobacco giants would do well to learn from – the relationship could be symbiotic.
Cannabis cannot and will not be a substitute for tobacco. However, this is not what the tobacco industry needs. It has a critical need for new products to diversify its business, so the incorporation of legal cannabis seems like a logical step for tobacco companies to consider.
Tobacco has a shelf life long enough to remain extremely profitable for some time. Cannabis is not a quick fix to lowering income in the short term; rather, it is a long-term opportunity. It could be a critical investment for the future for an industry that wants to remain the basic lifestyle that it has been, for better or for worse, for the past 100 years or more, and not to become the next great empire to go up in smoke.