By Nick Weising
Cannabis, whether recreational or medicinal, is now legal in 36 states. On March 31st, the state of New York legalized recreational marijuana, adding the Empire State to the large list of states with legal cannabis. Likewise, the Biden Administration and Democratic Congress may further loosen federal enforcement. This is a dramatic turn from the state of legalization just a few years ago, largely because of changing public perception. Once seen as a hard narcotic, marijuana is now largely viewed more mildly, with state governments seeking to tap into marijuana-related tax revenues.
The US marijuana market has grown significantly in recent years. Research from Brightfield Group indicates that the international cannabis market is projected to hit $31.4 billion by 2021 with the U.S. currently driving more than 90% of worldwide sales. According to Marijuana Business Daily, the legal market in the US will reach between $11.2 and $13.7 billion in retail sales this year and could grow to reach $30 billion by 2025.
The business world is not unaware. Large corporations in sin industries have been taking large stakes in cannabis companies in the United States and Canada. Altria, the parent company of Philip Morris USA, paid $1.8 billion for a 45% stake in Cronos Group, a publicly-traded marijuana conglomerate based in Canada. Alrtria also patented a variety of marijuana products and devices, suggesting that the future of cannabis consumption will be via vaping and ingestion. Although recent investments by the firm have faltered, Altria continues to inject capital, indicating strong faith in the long-term prospects of the marijuana industry.
Big Tobacco companies are not the only ones dipping their toes into the market. Alcohol giant Constellation Brands, the makers of Corona beer, bought a 38% stake in the largest Canadian cannabis company, Canopy Growth, for $4 billion in August 2018. This deal was preceded by a smaller $200 million investment in October 2017 by Constellation. Heineken has also invested in Canadian marijuana businesses, and Novartis, the pharmaceutical giant, entered into a strategic arrangement with Tilray, one of the largest medicinal cannabis companies in the world.
In many ways, investment by tobacco companies into the marijuana industry is reminiscent of Big Tobacco’s entry into the vape market. Philip Morris USA took a minority stake in Juul Labs, which today is the largest vape manufacturer. Many adult smokers have switched over to vaping as a healthier alternative to cigarettes. However, backlash from underage users, tighter regulations for poor-quality products, and an increase in the smoking age hit the vape market hard. Bloomberg reported that vape sales in the US fell as much as 13% in 2020, having previously forecasted a 10% year-on-year increase. Seeking to mitigate risks from the vape industry, Big Tobacco is again diversifying its portfolio, this time with marijuana.
Yet unlike the tobacco industry in the 20th century, the marijuana industry is filled with newcomers. One such business is Leafly, which produces news and retail content for cannabis-related products, including marijuana itself. Another disrupter is Cookies, a marijuana grower based out of California known for its variety of different strains. Grenco Science, the pioneer in advanced cannabis vaporizers, launched the Cookies G Pen Gio, and Cookies family-certified concentrates have been developed exclusively for the device, including “London Pound Cake,” “Sherbert,” and “Gelato.” The crossover between vaporization and marijuana is a way to further legitimize consumption. Indeed, the number of marijuana-adjacent businesses and companies that service growers is forecasted to continue to expand. Tokken, for instance, provides banking services that ensure marijuana-based businesses can thrive without institutional capital. Acting as a legally compliant intermediary, the Colorado-based company ensures marijuana growers and sellers have access to much-needed financial infrastructure.
Compared to tech startups, companies in the marijuana business can leverage an important advantage: whereas tech companies often face the need to create demand, or to at least educate their consumer base regarding their product, marijuana startups enjoy high levels of existing demand. Consequently, investors who once backed tech firms are now investing in the cannabis industry. In 2014, PayPal co-founder Peter Thiel became the first institutional investor to finance the market. Poseidon Asset Management, a hedge fund founded in 2013, invests exclusively in the cannabis industry. The firm specializes in agriculture technology, compliance tech, genetics and lab testing, and data analytics sectors.
The industry has also grown more complex as both consumers and producers become more experienced and incumbents develop economies of scale. There is a real difference in the genetics and quality of cannabis depending upon its cultivator. The use of pesticides, un-regulated because the plant is still pending federal approval, is a common area of concern. Yet demand is sky-high for specialty products. Numerous complaints were filed with the Los Angeles City Council concerning Cookies customers disrupting the peace before or after visiting the vendor.
However, most big players outside of sin industries are waiting to move due to negative public perception. In September, Target.com began selling CBD-infused products, a non-psychoactive cannabis derivative. Within days, the company changed its mind and removed the products. Coca-Cola explicitly commented that the company has no plans on entering the cannabis market. This hesitancy opens the door for the “cottage” side of the industry to emerge, especially in retail. It allows for companies like Cookies and Leafly to exist. They acknowledge as such: “Ultimately cannabis will look a lot like beer;” “You have the large firms that dominate the market, but there’s still a thriving marketplace for craft beer.” said F. Aron Smith, executive director of the National Cannabis Industry Association.
Ultimately, cannabis is an industry on the rise while tobacco and alcohol are on the downswing. Regardless, there will undoubtedly be hiccups on the road to mainstream popularization. Yet so long as the marijuana industry does not realize institutionalization and other traditional retail companies continue distancing themselves, there will continue to be massive opportunities for small-scale entrepreneurs to grow within the industry.