The US cigarette market is a $100 billion dollar a year business, with five major brands garnering more than half of that $100B. Today, Camel cigarette maker Reynolds American, Inc. ($ RAI) bought Newport maker Lorillard, Inc. ($LO) for $25M. The deal will allow Camel to own 35% of the market, after shedding a few brands for the regulators. If you are a smoker, you know that Marlboro is the other big kid on the block. This looks more like a reflexive consolidation move by Reynolds as the millennials shift to E-cigarettes and the beta test for pot we call Colorado gets traction.
Reynolds must shed Kool, E-Cigarettes, Winston, Maverick and Salem to appease US Regulators to British giant Imperial Tobacco. Expect more mergers to happen in 2015, and shifts that increase margins for the leaders in tobacco make Altria Group Inc. ($MO) and Phillip Morris International Inc. ($PM) likely targets.
I don't often cover the tobacco companies, but a shift in the way the consumer thinks about tobacco is coming as the demographic ages. The real opportunity here is manifesting itself in the E-Cig market, because it is a precursor to the legalization of marijuana as part of the new economy.
Pot Legalization Will Change Consumer Demand for All Smoke Products
One hundred billion dollars is spent on legal smoking products today in America, and every tobacco executive knows that $100 billion is spent in the black market on illegal marijuana and soon (like Colorado) the consumer will emerge from behind the curtain and spend money legally at the counter. They will pay taxes and buy a variety of smoking products and accessories- it is already happening in the beta state of Colorado. The numbers are as predictable as tobacco sales, because the black market consumer of pot spends as much monthly on weed as on cigarettes. This will not change, the only question that remains is this: When will the large tobacco position themselves to own pot sales? It is not a question of “if,” by the way, only a question of “when.”
My observation is that RAI made the first step in that positioning today with the reshuffling of the deck, and it is important to watch how the other two large US based tobacco growers get acquired, and how that deck is reshuffled. I am not a big follower of tobacco because it's a commoditized business, but that’s all about to change.
I am a major proponent of legalizing pot and getting the nation out of the beta stage that its in. Our country should be using those taxes for roads, schools, police and firefighters, and not keep feeding the black market distribution system with silly programs like the "war on drugs," which has been a stupid waste of everyone's time and money. Emerging politicos will utilize the next election round to mesh the pot tax revenue into public coffers.
Pot will be legal by 2017 across the US, big tobacco will own it, and it will kick off massive revenue. This is not far away – it is projected to be a 2017 event nationwide, so I guess I will start to follow this important emerging sector of the consumers’ wallet. That said, it's still odd for me to watch a $100B black market run side by side with a $100B legal market, where one pays tax and the other hides in the shadows. This seems stupid, but from the consumer analyst standpoint, it’s an exciting growth area where the stock market opportunity will extend far beyond the brands of Camel and Newport.
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