Barclays European Consumer Staples analysts issued a rather large report (over 60 pages) about the cannabis industry a few weeks ago. The report, titled "Cannabis Inc. -- A growing industry," was authored by analysts Gaurav Jain and Mandeep Sangha with Lauren Lieberman, the U.S. Beverage analyst.
The analysts noted that it was written on the back of a rising number of investor inquiries -- and the writers considered the report to be an industry primer. Yet one thing that seemed to stick out the most is the connection it makes between cannabis and tobacco.
The report discusses the disruption in the beverage market, but points out that there has been no disruption in the tobacco industry. "Somewhat surprisingly, the tobacco industry is not witnessing disruption yet -- none of the cannabis companies wants to sell joints," read the report.
Hmm. Prerolls or joints have actually grown from 5% of the U.S. dollar mix of sales in 2016 to 8% in 2017 according to a report penned by Cowen & Co. using Headset point of sale data in legal states. Beverages are only 1% of the market -- and this number didn't increase between 2016 and 2017. It remained flat. Most cannabis brands often offer a preroll as a form factor -- and while the growth hasn't been as large as vape sales, it isn't far from the edible market share of 10%. So, yes cannabis companies sell joints/prerolls -- and they sell a lot of them.
Big tobacco is just as interested in cannabis as the beverage companies. While all of the attention has gone to Constellation Brands (STZ) and Coca-Cola (KO) , British tobacco company Imperial Brands (IMB) made an investment this past summer in Oxford Cannabinoid Technologies. It's a company that focuses on developing CBD compounds and therapies. It happens that one of IMB's directors is also Chairman at Canadian-based cannabis company PharmaCielo.
North Carolina-based tobacco company Pyxus International (PYX) has been investing in cannabis through its subsidiary FIGR Inc. and owns an 80% stake in Goldleaf Pharm and a 75% stake in Canada's Island Garden. It has been rumored that Altria (MO) may say something about cannabis in its upcoming earnings announcement, as Murray Garnick, executive vice president and general counsel at Altria, told an investor conference in September that the company is now "exploring options and [is] mindful of the possibility [that] in the future cannabis may no longer be illegal under federal law," according to a FactSet transcript. In 2016, Philip Morris (PM) invested $20 million in a company that makes medical cannabis inhalers called Syqe Medical.
The analysts also believed that many cigarette smokers would gravitate to cannabis. The report highlights that people who smoke cigarettes die from tar. "It is likely that cannabis smoke contains many of the harmful chemical constituents of tobacco, including carcinogenic tar, cyanide and carbon monoxide." It completely neglects to recognize the intense level of lab testing that cannabis products go through now before they can be sold to the public.
A New England Journal of Medicine report found that you would have to smoke three or four joints a day to equate with the damage of a pack of cigarettes. That would be an extremely heavy cannabis smoker. It's a valid concern over market disruption, as one report did determine 85% of marijuana smokers who quit tobacco smoking made the change after beginning regular marijuana smoking.
Yet a different report found the opposite, Renee Goodwin, of Columbia University School of Public Health in New York City, and her team found that marijuana use was associated with an increased risk that nonsmokers would start smoking cigarettes. In her report, consuming cannabis lowered the likelihood that a smoker would stop and then had a greater chance of returning to the habit. So, a bonus to tobacco companies.
The analysts also felt that cannabis companies hadn't targeted smokers as potential consumers. Many cannabis companies associate themselves with wellness. The packaging, the websites, and marketing all focus on the earthiness of the plant. There are CBD prerolls/joints that are specifically created just for the medicinal side of cannabis. Many of the companies point to the natural qualities of cannabis and how the products are pesticide-free or organic. This is a completely different audience than tobacco smokers that used to characterize their audience as cowboys and cool, hip people.
While the report is an excellent primer in many ways, its section on tobacco and cannabis just didn't ring true. As cannabis smoking increases due to legalization, cannabis consumers seem a decidedly different type of customer than tobacco customers, and they use the product for a different type of result.
Perhaps that is why there hasn't been industry disruption -- even though sales for prerolls have increased. These are two very different consumers, and two very different plants.