Why is the vape and cannabis industry favored by tobacco giants

Marlboro cigarette maker Altria Group has made a series of big moves: not only to acquire two Canadian star cannabis producers, but also to take a stake in the electronic cigarette company Juul with the largest market share in the United States.

As one of the largest and most profitable tobacco companies in the world, Altria Group, a Marlboro cigarette manufacturer, has always adhered to the principle of high-profile products while the low-profile company image, making a lot of money, but recently it has broken many years of low-profile image and entered major financial media.

Altria has been exposed in succession to two surprising business actions: a plan to acquire Cronos and Tilray, two Canadian cannabis producers, at the beginning of this month, and a 35% stake in Juul Labs, an American e-cigarette startup.

No matter the Canada’s influencer cannabis company Cronos and Tilray, or the Juul Labs, the most popular electronic cigarette startups, are all trending companies. Its price is already high. For this reason, Altria will spend at least US $14 billion, which is even higher than its net profit in the 2018 fiscal year ($10 billion 700 million).

In addition to the high cost, Altria’s three capital transactions will drag itself from one predicament to another: under the pressure of the anti-smoking wave, Altria has to put words on all cigarettes to advise consumers not to smoke cigarettes. Now, they are busy redesigning the tobacco market and entering new fields, which will inevitably face new challenges, especially the hemp industry in the process.

What are the implications of Altria’s actions?

To borrow a comment from CNBC, this marks Altria’s devotion to a new field of competition. Today’s tobacco market, or nicotine market, is no longer the tobacco market that has existed for centuries.

Great Changes in Traditional Tobacco Industry
From the point of view of stimulating human nerves to remain excited while producing dependence, traditional paper cigarettes, electronic cigarettes and marijuana are all known to have these characteristics. Their common core is nicotine. However, they are also different.

Cannabis is the most regulated. In most countries in the world, such as the United States, it is illegal to smoke cannabis. Although legislation has been gradually liberalized in some states, it is still not allowed at the federal level in the United States. Medical cannabis also has strict restrictions on its use.

In recent years, electronic cigarettes have become more and more popular and popular among young people. Nevertheless, there are still many countries that strictly control electronic cigarettes, such as Singapore.

Paper tobacco has the longest history, the most habitual smokers, and most countries allow it legally. According to the data provided by the World Health Organization, there are 6.5 trillion paper tobacco sold worldwide every year, with an average of 18 billion cigarettes per day. The number of smokers has reached 1.1 billion. The huge consumer group has made the tobacco industry one of the most profitable industries for many years.

China’s tobacco consumption is quite conspicuous in the world. According to the Tobacco Atlas published by the American Cancer Association and the World Lung Health Foundation, as early as 2016, Chinese tobacco consumers accounted for more than 40% of the world’s total consumption:

Why is the vape and cannabis industry favored by tobacco giants
However, with the enhancement of people’s health awareness, the voice of opposition to paper smoke in society has become higher and higher, and the voice of anti-smoking has been rising one after another.

At the same time, electronic cigarettes are eating up more and more shares of traditional paper cigarettes. In the past few years, the consumption of paper cigarettes has been declining year by year. According to the CDC data, the smoking rate in the United States dropped to its lowest level last year.

Currently, the United States, Japan and the United Kingdom are the world’s largest e-cigarette markets. Consumers in these three countries purchased a total of 16.3 billion dollars worth of e-cigarettes and related products in 2016. Bonnie Herzog, an analyst at Wells Fargo Bank, believes that the U.S. e-cigarette market is expected to reach 66.3 billion dollars this year.

In addition to electronic cigarettes, the cannabis industry is also expanding. According to the Cannabis Business Daily, the total demand for cannabis sales in the legal and black markets is about $52.5 billion.

Tobacco giants bet on many sides

Altria’s three acquisitions show that the tobacco giant is eager to transform in a shrinking traditional paper tobacco market. They may think e-cigarettes and marijuana may be a good way to cope.

Philip Morris of Altria has also expanded into electronic cigarettes. They produce IQOS brand electronic cigarettes. Once approved by FDA, Altria will start marketing and selling the product.

In addition, Altria is expanding its business by buying Juul Labs, currently the most popular electronic cigarette company in the United States, while providing some form of risk hedging for IQOS brand electronic cigarettes.

Juul Labs currently holds up to 70% of the U.S. e-cigarette market. It sells products in Canada, Britain, Israel and Russia, and is interested in expanding its European and Asian businesses.

The Wall Street Journal quoted sources as saying that Juul’s gross profit was as high as 75%, far exceeding that of traditional tobacco companies, and its annual revenue was expected to reach $2 billion.

“Juul Labs is clearly a game changer in nicotine-related industries,” Cowen & Co. analyst Vivien Azer wrote in a research report.

Juul Labs is currently valued at about $38 billion, double what it was a few months ago, and even more than the $50 million new founded Tesla by Mask.

Juul Labs, which is rapidly expanding, is in line with the needs of Altria in transition.

As the glory of paper tobacco fades, Altria’s share price has fallen sharply this year, dropping nearly 30% so far, albeit slightly less than the entire tobacco sector. In fiscal year 2017, the company’s net profit attributable to its parent company fell nearly 30% year on year. The following chart shows the changes in the company’s net profit:

“We are taking significant action to prepare for the future. In the future, the vast majority of adult smokers will choose non-combustible products over cigarettes. We have always believed that providing adult smokers with high-quality, satisfactory products that reduce health hazards is the best way to reduce tobacco hazards,” Cronos and Tilray, Canadian cannabis producers, said in a statement. This year’s star company, the two companies are able to rise rapidly because of a key background: marijuana has been legalized in some markets around the world and has become a substitute for some alcoholic drinks on some occasions.

In mid-October, Canada became the world’s second and G7 first country to legalize recreational cannabis after Uruguay. Michigan recently decided to authorize people over 21 to legally own, use and grow cannabis products.

As the legalization of cannabis in North America begins to loosen, cannabis is showing its amazing business prospects. Recreational cannabis is likely to compete for alcohol and cigarettes. In addition, cannabis has been involved in the pharmaceutical industry and its impact extends beyond pension services. For those who receive cancer treatment and suffer from insomnia, cannabis drugs are effective.

Just recently, AB InBev, the world’s largest brewer, announced that its Canadian subsidiary, Labatt Breweries, would invest $100 million in cannabis-based beverages with Tilray. Even Coca-Cola, which was founded in 1886, entered the cannabis market in September and plans to work with Aurora Cannabis Inc., a Cannabis licensed cannabis producer in Canada. Joint development of beverages containing cannabinol.

Potential hardship

As mentioned earlier, Altria faces many obstacles in betting on electronic cigarettes and cannabis.

Most important are anti-tobacco and anti-marijuana advocates. Many people have been criticizing Altria’s plans to acquire two companies to attract young people in order to win potential lifetime users.

Bloomberg quoted Matthew L. Myers, chairman of the Tobacco-Free Kids movement, as saying in a statement that the deal was a truly shocking development for public health, bringing together two companies that had been successful in marketing children to their highly addictive products.

Matthew L. Myers called for the U.S. Food and Drug Administration (FDA) to take urgent measures to prevent tobacco companies from subverting decades of progress and addicting a new generation of children.

In the United States, the number of teenagers who smoke electronic cigarettes is growing rapidly, with about one fifth of high school students using electronic cigarettes. To this end, the FDA took an action in September to prevent children from using electronic cigarettes. Currently, federal law prohibits the sale of electronic cigarettes to people under 18 years of age.

For Philip Morris’iqos electronic cigarettes, the FDA said earlier this year that there was no evidence that the product was a safe alternative to cigarettes.

Moody’s, the rating agency, downgraded Altria’s debt outlook from stable to negative after the announcement of its purchase of Juul on the grounds that the company would face double regulatory risks in the areas of electronic cigarettes and cannabis and might be involved in potential lawsuits in the future.

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