High time for big tobacco

No matter how you feel about its ethics, there is no denying the returns big tobacco has offered investors over the years.

In fact, for 115 years, tobacco has been, by far, the best industry to invest in. In that time tobacco’s returns beat the market average by 16,300%.

According to Credit Suisse, $1 invested in tobacco in 1900 would now be worth $6.3 million. That’s compared to the market average return of $38,000.

However, the last century was far less health-conscious than this one. And for much of it, people didn’t even know smoking was bad for you. Today, it’s a different story. Smoking is in decline, especially among the young.

Tobacco companies have had to become more efficient, branch out to emerging markets and consolidate to keep profits high.

They have done well and the industry remains strong. British American Tobacco (BAT) stock, for instance, is up over 335% in the last ten years. But culture is changing, and this ride can’t go on forever.

Big trouble in big tobacco

Smoking rates among teens in America have dropped massively over the past 19 years. Down from 25% in 1997 to 5.5% in 2015. As you can see below:

graph of cigarette use - big tobacco

Source:Institute on Drug Abuse; National Institutes of Health; U.S. Department of Health and Human Services.

So although the current adult market for cigarettes remains fairly stable, once the current generation moves on, big tobacco is in big trouble.

But big tobacco didn’t become the most successful industry of the last century by accident. And it would be foolish to think it hadn’t seen this change coming. Clearly it must have a plan – and what a plan it is.

This plan has been almost half a century in the making. But it has only recently come to light.

Thanks to a number of lawsuits against big tobacco, more than 80 million pages of internal company documents have been made public. (You can read the research on them here, if you’re interested.)

They show that while publically big tobacco has denied any such plan exists, behind closed doors, it’s just been waiting for the stage to be set.

Now, after 46 years, all the pieces are finally in place.

The memos we were never meant to see

In January 1971 Time magazine reported: “Tobacco men are … discussing the potentially heavy market for marijuana, and some figure it could be legalized within five years.”

Big tobacco, of course, denied any such discussions had taken place. The six major cigarette companies issued press releases denouncing the article and Time was forced to print an apology.

The then CEO of Philip Morris (PM), Joseph Cullman, even went as far as to have a message printed in Time stating PM had “held no discussions”. What we now know is that like any good spokesman, he was lying through his teeth.

As this memo to PM’s manager of chemical and biological research, dated September 1969, reveals, PM had been discussing this market for some time.

From all I can gather from the literature, from the press, and just living among young people, I can predict that marihuana smoking will have grown to immense proportions within a decade and will probably be legalized. The company that will bring out the first marihuana smoking devices, be it a cigarette or some other form, will capture the market and be in a better position than its competitors to satisfy the legal public demand for such products. I want to suggest, therefore, that you institute immediately a research program on all phases of marihuana.

And PM wasn’t the only one. BAT’s internal documents contain this gem. It was written by Sir Harry Greenfield, one BAT’s taxation consultants in March 1970:

One of my ideas which I want to talk over with you concerns the possibility of drawing upon the immense amount of research done by the tobacco industry into the smoking of tobacco and utilizing it for research on Cannabis.

He goes on to say:

I consulted Sir Charles Ellis who is our principal adviser on technical research. He himself is rather taken with the idea and has been good enough to prepare a rough note which I enclose so that you may have time to read it before we all come together next Tuesday.

The note he “enclosed” states:

Smoking such [a cannabis] cigarette is a natural expansion of current smoking habits which, if a more tolerant attitude were ever taken to cannabis, would be a change in habit comparable to moving over to cigars…

The proposed research can be started off very simply, it is just to do for “cannabis-loaded” cigarettes what has already been done for normal cigarettes.

So as we can see, big tobacco has had big plans for cannabis for quite some time.

Prohibition puts plans on hold

Unfortunately for these tobacco companies – and for many millions of innocent people all over the world – in June 1971 President Nixon declared a “war on drugs”.

America’s stance on recreational drugs of any kind changed dramatically. New laws were enacted. And the powers that be spent billions of dollars and thousands of lives trying, and ultimately failing, to change human nature.

It’s only now, after almost half a century of fruitless fighting, that “the man” is beginning to admit defeat. That’s good news for humanity, and great news for big tobacco.

The spoils of war

As Eoin Treacy points out in this month’s recommendation, America’s attitude towards cannabis has changed over the last few years.

Medical marijuana is now legal in 22 states. And four states also allow recreational use. If California votes to legalise for recreational use on 8 November, Eoin believes it will open the flood gates, with many more states wanting to cash in on the tax revenue.

The war, it seems, is almost over. And big tobacco has been waiting almost half a century to collect the spoils.

Just how big could this market be?

In 2015 total legal sales of cannabis hit $5.7 billion. By the end of this year that figure will reach $7.1 billion, and top $22.8 billion by 2020 – according to data from ArcView Market Research and New Frontier.

But if California votes yes, and the other states follow suit, cannabis’ true market could be colossal. As you can see below, when you add in illegal demand, the market for marijuana tops chocolate, organic food and even wine.

chart of Cannabis sales - big tobacco

It’s easy to see from the above just why big tobacco is so interested in this industry.

Rolling over the competition

Right now the cannabis industry is like the car market of 1907. It’s full of small players sorely lacking in expertise. The arrival of big tobacco could be like Henry Ford inventing the Model T.

Look at it this way…

Big tobacco has the farmland, the distribution, the packaging expertise, the marketing and the infrastructure already in place – and on a massive scale. It’s in a perfect position to step in and control the entire industry.

And moving into cannabis is also a great way to attract and retain a younger audience.

Remember those stats showing smoking decline among children? Well, it’s a different story for cannabis. In 2015, for the first time ever, daily marijuana use topped daily cigarette use among schoolchildren.

Graph of Marijuana vs cigarette use in young peopleSource: National Institute on Drug Abuse; National Institutes of Health; U.S. Department of Health and Human Services.

Obviously, big tobacco wouldn’t want too much being made of these stats. Whichever way you look at it, smoking children aren’t good press for the industry.

And that brings us to the final piece of the puzzle: big tobacco’s image.

Reefer redemption

The big pharma plot is a staple of conspiracy theorists everywhere.

The story goes like this. Big pharma secretly creates and releases a new disease, which it then makes millions selling the treatment for. It’s a classic conspiracy theory and it never really goes away. And big tobacco – admittedly unwittingly – could have just found itself in a very similar position.

As cancer.org states:

Scientists reported that THC and other cannabinoids such as CBD slow growth and/or cause death in certain types of cancer cells growing in laboratory dishes. Some animal studies also suggest certain cannabinoids may slow growth and reduce spread of some forms of cancer.

Think about it: what’s the leading cause of cancer? Smoking. What’s the new cancer treatment on everyone’s lips? Cannabis. And who could be in a position to control the entire market for both? Big tobacco.

If you’re big tobacco, that’s a pretty good sales route to find yourself in.

And it’s not just cancer. Cannabis has proven success as a pain treatment for everything from arthritis to migraines. And it’s especially good at treating the side effects of chemotherapy. What could be a better “pivot” for the tobacco industry than to go from cancer-causers to disease-curers?

It might sound far-fetched. But big tobacco has shaped our popular culture for decades. It has managed to keep people smoking even though everyone knows it’s killing them. Imagine what it could do with a product that does the opposite.

Right now, most people despise big tobacco. But 20 years from now it could be a different story.

The new Marlboro Man might be a picture of health. What we now call “cancer sticks” could well be called “creativity candles” in the future. If anyone has the means to make an image change like that, it’s big tobacco.

If the legalisation movement really takes hold, aside from changing millions of lives, it could see big tobacco creating some of this century’s best investments, too.

Category: Commodities

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