Big Tobacco Makes First Official Foray Into Cannabis as Tobacco Sales Continue To Fall
Phillip Morris USA’s parent company, Altria, the guys responsible for producing world-famous cigarettes from the Marlboro brand, have officially become the first tobacco company to invest in cannabis.
The investment injected a whopping $1.8 billion for the Canadian cannabis company, Cronos Group, reports CNN. This makes Altria owner of a 45% stake in the cannabinoid company, but and although that isn’t so surprising, what’s even more shocking is the revelation that they will be discontinuing their cigarette vape brands Green Smoke and MarkTen. Altria will also be dropping their oral nicotine, Verve, and are still on the fence about investments in a leading e-cigarette company Juul.
Cigarette sales have steadily been declining, and former cigarette consumers are now turning to other forms of safer recreational products including e-cigarettes as well as cannabis. This change of heart with cannabis consumers is showing that slowly but surely, cannabis is going to topple cigarettes eventually. From one vice to another (safer) vice, although it only makes sense because cannabis has been proven to be healthy while cigarettes have not – and we’ve known this for a long time now.
“The proceeds from Altria’s investment will enable us to more quickly expand our global infrastructure and distribution footprint, while also increasing investments in R&D and brands that resonate with our consumer,” Mike Gorenstein, Cronos CEO, disclosed in a statement. The move also helps “make sure we’re getting in front of regulators,” Gorenstein told CNBC.
“Altria is the ideal partner for Cronos Group, providing the resources and expertise we need to meaningfully accelerate our strategic growth,” he added.
Risky Moves For Altria?
Although this isn’t the first time an American vice company is engaging in long-term romances with Canadian cannabis firms, it’s pretty easy to see why this could be a risky move.
The first was Constellation Brands, parent company of Corona beers, who pumped up their investments in Canopy Growth for a 9.9% stake in the firm. Then within the same month, Hexo, Canadian cannabis producer announced that they were engaging in a joint venture with Molson Coors to create a line of “non-alcoholic, cannabis-infused beverages for the Canadian market.” This business, known as Truss, revealed to be a successful JV and they are soon going to be releasing their products in the Canadian market by 2019 once the country legalizes cannabis-infused beverages.
This deal is definitely good news for shareholders of Cronos, because it catapults them to rock star Canadian cannabis company status thanks to the massive investment, with the support of one of the most powerful cigarette producers in the entire world. But what does this mean for Altria, who paid a very steep price for what is now still a mid-size Canadian cannabis producers. Moving forward, Cronos could benefit from Altria’s proficiency in navigating extremely regulated markets. Additionally, it could take Altria another several years to benefit from this deal, so while it initially does seem like a risky move for Altria, it could take a while for this to play out to both sides’ benefits but it isn’t impossible.
Altria’s stock fell by 25% this year so far, but after they announced they would be tying the knot with Cronos, their stocks jumped 2% on Friday after early trading, while it sent Cronos shares soaring around 30%.
“Importantly, Altria shares our vision of driving long-term value through innovation, and we look forward to continuing to differentiate in this area,” Gorenstein says. “As one of the largest holding companies in the adult consumer products sector, Altria has decades of experience in regulatory, government affairs, compliance, product development and brand management that we expect to leverage, particularly as new markets for cannabis open around the world.”
At the end of the day, cannabis remains to be perhaps the most volatile and unpredictable industry. Just look at the supply shortages that are threatening Canada’s industry, while other countries around the world continue to entertain the possibility of legalizing cannabis for recreational purposes. It will be interesting to see how this deal will pan out in the next 6 months or so, and which “sin company” ties the knot with cannabis next.