Investing in the Green Economy
The story about I’m about to tell is entirely true.
Two years ago I was doing a show at the Wall Street Journal and so was Cheech & Chong’s Tommy Chong.
Well known for his roles as a pot smoking hippie entertainer, Tommy Chong is also a pioneer in the cannabis business. He had a thriving business selling smoking paraphernalia until he was busted in 2003 and sent to jail.
Back then it was illegal to sell paraphernalia across state lines. He was selling over the internet. (On a side note, when he went to jail, his cell mate was Jordan Belfort, the famous “Wolf of Wall Street.” It’s said that Tommy encouraged him to write his memoirs and the rest is history.)
Today pot is legal in many states. Things have obviously changed a lot since.
Tommy and I discussed the future of cannabis and we had two different conclusions.
Tommy, who was promoting his new line of cannabis smoking gear, believed that there would be no change to the way people smoked pot.
I have much different views. I see the mainstreaming of cannabis presenting a lot of opportunities because the way consumers buy and enjoy pot will all be different.
Pot smoking has a certain ritualized set of social customs, and for many people it will always be so. For them, smoking is done behind closed doors, with special accoutrements, and a sense of shared rebellion. But the mainstreaming of marijuana means that it will become more like any other consumer consumable where convenience takes over.
Translation: bags of aromatic pot and water pipes belong to the past, and the future belongs to hash oil and vaporizers (vaporizers or “vapes” are battery operated pipes that heat concentrated oils into a low-temperature smoke; they debuted as eCigarettes).
There are many reasons why the market is moving away from the leafy version of cannabis and moving towards the concentrated version: hash oil.
∙ Longer shelf life
∙ Lower shipping cost
∙ Easier to navigate regulations
∙ Easier consumption
∙ Better quality control
Cannabis is a plant. and like any other produce it has limited shelf life and is bulky to ship.
Conversely, hash oil lasts a long time and is easier to ship and portion out. Instead of selecting from a jar of cannabis buds and weighing the product, most consumers will favor pre-measured packs. It’s the difference between buying cheese at the grocery store or at a cheese shop: both can co-exist, but the grocery stores sell infinitely more product.
And, while both the plant and the oil are subject to myriad government regulations, an oil-based derivative will, by nature, avoid problems like fungus, mites, etc.
Moreover, smoking oil is easier and more consumer friendly: no lighters are needed (vapes use batteries), no smelly bags of pot to carry around, no organic residue to deal with, and so on.
And for consumers, quality control is more easily ensured in an oil that can be tested and adjusted as necessary. Farmers can sell their crop to companies that process it into oil. It’s the difference between a garage economy and an industrial process which requires scalability at consistent levels of quality control.
In fact, this is a familiar process for liquor companies: a lot of booze in the US is actually outsourced to bulk distilleries like the Midwest Grain Products (MGP). MGP supplies the alcohol for well-known brands like Templeton Rye, George Dickel, Seagram’s gin and vodka. Scalable, quality controlled product. It’s what people want and what big companies can deliver.
Until now, pot smoking was under the radar and people bought what they could get. Quality varied. With cannabis now legal, consumer choice now enters the picture. And a critical shift will take place where consumers will expect certain levels of quality and consistency.
At heart, cannabis will be legalized nationwide and will be transformed by the economics and efficiencies required of mass production.
For this reason, I don’t see much future for small players on the production side.
Eventually Philip Morris and other big tobacco companies will enter the market. They are infinitely better prepared and capitalized to take the crop national. And producers face ordinary market pressures, like falling prices.
Based on tax revenues, Colorado pot prices are dropping. And that’s without significant competition (the number of growers and quantity grown is local, limited and regulated).
If Not Production, What About Distribution?
States have created a special set of stores that are regulated. There’s a problem with this. A duplicate sales channel makes no sense.
Liquor stores and similar retailers have decades of experience selling controlled substances like tobacco and alcohol. And, most importantly for the State, collecting the taxes. Marijuana is just one more item on the shelf.
One idea: Focus on the next generation accessories
Before the time of cheap, disposable lighters, smokers relied on lighters that had to be refilled. A fortune will go to the company that mass-produces cheap, disposable vapes.
KEY POINT: Marijuana is going to see incredible growth over the coming years. Big tobacco players like Philip Morris are likely to be the winners because of their size and scale. Small players are likely to be the losers. Steer clear. We’ll continue to monitor this industry as it becomes more established nationwide as more States legalize and sell marijuana.
Sincerely,
Andrew Zatlin
Editor of Moneyball Economics
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