Marijuana could be Big Tobacco’s next pot of gold

Wine, chocolate — pot.

If the estimated $45 billion or so of yearly demand for recreational marijuana is in the right ballpark, then more Americans crave cannabis than cabernet or candy bars. And as legalization efforts pull marijuana sales out of the shadows of the black market, an industry is, er, budding.

Right now, it’s messy, shadowy and highly fragmented — and the public companies involved in it are mere penny stocks. But as U.S. states increasingly move toward some form of legalization of the substance, that will change. In February, Alaska officially became the fourth state to legalize pot (with restrictions), following Colorado, Washington and Oregon, as well as the nation’s capital. Some others have decriminalized it or allowed for medicinal uses and are inching toward a further loosening of the laws. In other words, states representing about half the country’s population may soon allow for the purchase of marijuana in some form.

If marijuana consumption becomes legalized at the federal level (and leaving aside health and moral issues), Big Tobacco should stake a claim. Cigarette makers are grappling with declining numbers of smokers, especially in the U.S. The smoking prevalence rate among Americans in 2014 — the latest available data — was 17.4 percent, down from 21 percent a decade ago.

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Lower gas prices have helped tobacco stocks as of late because almost half of cigarette sales are made at gas-station convenience stores. However, the broader trend isn’t moving in the industry’s favor.

Even though consolidation has been beneficial to the tobacco industry, few large deal options remain. Last year, Reynolds American, the owner of Pall Mall and Camel, completed a $28 billion merger with Newport maker Lorillard. Now, nearly 80 percent of cigarettes are sold by just two companies in the U.S. — Reynolds and the leader, Altria, which makes Marlboro. It’s a level of market concentration unheard of in many industries. They’ve invested in new smoking alternatives such as electronic cigarettes and vapors, but those account for just a fraction of the giant tobacco market and their growth potential is unclear.

The legal U.S. marijuana products industry “is so sizable now that consumer products companies can’t ignore it,” said Ken Shea, a food, beverage and tobacco analyst for Bloomberg Intelligence. Given the crossovers in manufacturing and marketing, as well as Big Tobacco’s skill in navigating regulation and lobbying in Washington, “it’s such a compelling opportunity for the tobacco companies to look at closely,” he said. And in fact, they have — roughly 40 years ago. Documents from the 1970s revealed that former executives at companies such as Philip Morris began looking into both the threat of and opportunity in cannabis in anticipation of it becoming legalized by the U.S. government. Similarly, packaged-food companies, which are also looking for ways to grow and attract younger generations, could expand into edible cannabis products.

On this 4/20 — the date on which the cannabis community celebrates its “version of Oktoberfest” — the reality of marijuana joints in big brand-name packaging may still seem far away. But it’s coming a lot sooner than you think. Companies doing the groundwork and getting ready to pounce will have a first-mover advantage. Tobacco has been one of the top-performing industry groups in the S&P 500 Index since the 1990s, and branching out into this space could give these stocks another breath.

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  1. If the sale and recreational use of marijuana is legalized in Rhode Island, Rhode Island should tax and regulate the use of marijuana like tobacco, not like alcohol. Alcohol is found in most homes and businesses in Rhode Island where children are present. This leads to children becoming addicted to alcohol. To protect our children from being exposed to marijuana, Rhode Island should control the growth, production, distribution, type, quality and sale of marijuana products. Private individuals would not be allowed to grow or use marijuana in public establishments. Rhode Island should choose a tobacco company to come to Rhode Island and grow, manufacture, package and distribute the marijuana products to be sold. Legal marijuana would be sold for the private recreational use of adults. Marijuana products would only be sold in vending machines owned and serviced by the state of Rhode Island and payment would have to be made with a personal credit card. The quality, strength and amounts sold each week would be regulated. Giving marijuana to children would be punishable by a fine of $1,000.00. Legal marijuana would available at thousands of locations in Rhode Island and at a lower price than illegal marijuana. The profits and taxes raised would eliminate the need for the car tax and fully fund education, healthcare and bridge repair in Rhode Island.