December 2018 saw the passage of an event cannabis industry watchers have been speculating about for decades. Big Tobacco finally took the first step towards what some fear will be an eventual takeover of the cannabis market, as Altria, the parent company of Marlboro and other American tobacco brands, invested $1.8 billion in Cronos Group, a Canadian company that focuses on rare cannabinoids. The tobacco giant now controls a forty-eight percent stake in Cronos, fueling rumors that North American consumers might someday be able to go around to the corner store and pick up a pack of “Marlboro Greens.”
Were it not for the politically and emotionally charged environment around cannabis, this would be an unremarkable, even expected, corporate merger. Cronos is the fourth most valuable publically listed marijuana company and uniquely positioned to roll out a mass-market production line. Its Canadian location is pivotal, as Canada voted on October 17, 2018, to become the first G7 country to allow recreational cannabis consumption nationwide.
Big Tobacco Looks To Insulate Against Future Market Trends
Although tobacco use in first-world countries is steadily declining and has been for decades, Altria still rakes in plenty of cash, reporting a revenue of $17.9 billion on the back of the sale of 125.4 billion cigarettes, enough for every adult in the United States to smoke a cigarette a day and two on Sunday. The expansion into marijuana is not a response to present market pressures so much as insulation against a possible future shift away from tobacco, as well as the present untapped potential of the millions of cannabis users who don’t consume any form of tobacco and are unlikely to ever start.
Up until the recreational consumption law passed, Cronos Group made most of its $3.8 billion per quarter through medical marijuana sales and overseas medical marijuana exports. Some of the Altria investment cash will undoubtedly go to ramp up production to meet the exploding demand for recreational cannabis in Canada, but expect to see Cronos Group join its competitors like Canopy in expanding overseas.
"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 consumers," Cronos Group CEO Mike Gorenstein told CNBC. "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."
The development is great news for Cronos Group and other large producers who may wish to attract megacorp investors themselves, but smaller growers and industry advocates have long been apprehensive of the potential negative effects of corporatizing the cannabis industry.
“This is what legal cannabis looks like,” said F. Aaron Smith, executive director of the National Cannabis Industry Association, a trade group based in Washington. “You’ve got some of the larger players taking interest, and that’s a good thing. It’s going to create more economic vitality, more jobs. 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.”
Small Cannabis Businesses Fear Aggressive Buyouts
Ask a craft beer brewer how they feel about seeing so many small-scale breweries get snapped up by InBev, “the world’s largest beer brewer,” a multinational conglomerate (merged from two other multinational conglomerates) that owns over 2000 beer brands.
Small growers and dispensaries run the risk of getting bought out, perhaps forcibly, by large corporations, while consumers may miss the sense of community, curated experience, and sensitivity to medical concerns that are a hallmark of the “mom and pop” dispensary experience but not traits people tend to associate with corporate chains in any industry.
Corporatization is the inevitable side effect of success, in activism, lobbying, and changing public opinion. Now there’s money to be made, and it’s not pocket change. Arcview Market Research, a cannabis-focused investment firm, reports that consumers are expected to spend $57 billion per year worldwide on legal cannabis by 2027. In North America, that spending is expected to grow from $9.2 billion in 2017 to $47.3 billion in 2027.
It’s a triumphant moment for cannabis activists, but not everyone who fought and sacrificed to reach this point gets to reap the rewards. “A lot of the people who worked to bring this day about are not really being included or honored,” says Steve DeAngelo, founder of California’s Harborside dispensary and a prominent cannabis activist.
Where goes legalization, regulation is soon to follow. Corporate growers with deeper pockets are more readily able to comply with new laws that affect the supply chain, such as California’s pesticide regulations that took effect this past July. There’s still an element of uncertainty that makes planning for the future hard for growers of all stripes.
Since marijuana is still banned at the federal level in the United States, the EPA hasn’t even begun to rate pesticides for safety in cannabis growing, so the costly revamp that California growers just invested in might not even be permanent, as it’s possible that the pesticides growers switched over to will fail to get an EPA recommendation when that eventually happens.
Growers and retailers worried about the looming threat of corporatization may find a reassuring precedent in a surprising business story: Starbucks. Though Starbucks was criticized by many for turning artisanal coffee into a mass-market, homogenous, some might say joyless retail experience, the widespread fears that the caffeine-distribution giant would run every mom & pop coffee shop out of business turned out to be unfounded.
Starbucks was so big, so influential, that its much-derided high prices became the norm. Americans who once made do with a watery mug of joe from the Mr. Coffee in the office were now daily drinkers of cappuccinos, espressos, and whatever trendy ingredient could be whipped into a frothy foam that month. When gourmet coffee became the standard, people started spending more on coffee.
A lot of that money went to Starbucks, sure, but once people got introduced to the world of beverage snobbery a lot of them began to appreciate their local coffee shops more, and those shops were able to craft more ambitious drinks, charge more for them, and see their customers return more often. A rising tide doesn’t lift all boats, but corporate money can carve out a bigger waterway.