How Big Tobacco Could Affect the Legal Marijuana Business

Who wouldn't want to smoke a Marijuana Marlboro? And who wouldn't want to sell them? Would Altria Group, Reynolds American, and Lorillard get into the game?

Mar 29, 2014 at 9:36AM

Marijuana legalization is a contentious issue that seems to have a clear end: Legalization and taxation may soon spread across the U.S. With the legalization already under way in Colorado and Washington state, it is easy to imagine similar relaxing of marijuana laws in other states in an attempt to replenish cash-strapped state budgets. Federal legalization could follow, allowing for the development of interstate marijuana-selling corporations.

Altria Group (NYSE:MO), Reynolds American (NYSE:RAI), and Lorillard (NYSE:LO) are obvious candidates to become the biggest nationwide marijuana-cigarette distributors. Parody magazine Abril Uno ("April One") ran a story announcing that Philip Morris will introduce Marlboro M's in Colorado and Washington to take advantage of marijuana legalization in those states. Of course, the story was false, but not implausible. In fact, there are only two major hurdles keeping Altria and friends from dominating the nascent market.

First hurdle: federal regulation
Federal regulation is the first major hurdle that must be cleared before big tobacco enters the marijuana business. Although Gallup finds that a clear majority of Americans -- 58% -- favor legalizing marijuana, it could be much longer before federal legalization takes hold, if ever. President Obama, a nominal supporter of marijuana prohibition, seems content to allow legalization to play out on a state-by-state basis.

In an interview with Fast Company, an Altria representative said that because of federal prohibition, Altria has no plans to sell marijuana cigarettes. As long as the threat of federal prosecution remains, banks will be unwilling to provide services to marijuana-related businesses, and interstate distribution will be virtually impossible. As a result, small businesses stand the best chance of succeeding in the marijuana market.

However, with growing public support for marijuana decriminalization and economic incentives for Congress to act, the door may soon be open for legal interstate marijuana distribution. Harvard economist Jeffery Miron published a paper that pinpoints $13.7 billion in potential government savings from legalization -- $6 billion in additional tax revenue and $7.7 billion in enforcement costs. More strikingly, the Federal Bureau of Prisons reports that half of all inmates in federal prisons are there for drug-related offenses. According to the U.S. sentencing commission, a little more than one quarter of imprisoned drug offenders between October 2012 and September 2013 were sentenced for marijuana-related crimes. As a result of crowded prisons and growing enforcement costs, both houses of Congress have introduced bills that would reduce the length of mandatory prison sentences for some drug crimes. As momentum gathers, we may soon see serious efforts to legalize marijuana at the federal level.

Second hurdle: product economics
Even if marijuana is legalized, it still is unclear if tobacco companies would want to enter the market. High taxes and a robust black market for marijuana will put a lid on profitability. One study found that proposed taxes in Washington would increase the cost of marijuana by 58%.

Even Altria's vast capital resources -- it generated nearly $4.4 billion in operating cash flow in 2013 -- may not provide enough scale to offset high excise taxes and compete with illegitimate operations. Based on a $2 per gram production cost, the above-referenced study estimated that the after-tax retail price of legal marijuana would be $16.99 per gram -- or $482 per ounce. The stunning markup comes after the marijuana is taxed at the producer level, processor level, and retail level.

According to, which aggregates user-submitted marijuana prices by state, marijuana prices exceed $400 per ounce in only one U.S. state: $401 per ounce for high-end marijuana in North Dakota. The website marks medium-grade marijuana at slightly less than $200 in Colorado and Washington. Altria will be unable to compete with these prices, regardless of the scale of its operations.

Only one way to compete
The only feasible way for Altria, Reynolds American, and Lorillard to compete against lower-priced competitors is to build premium brands that deliver consistent quality. Marijuana comes in all different varieties and potencies; the average consumer of legal marijuana may not want to get a surprise every time he or she inhales a new purchase. Big tobacco companies are in position to provide large-scale, consistent-quality marijuana cigarettes to an American public that wants to take the edge off.

For instance, Altria's Marlboro brand already has a strong following of loyal cigarette smokers. Marlboro has a 43.7% share of the tobacco market. Reynolds' Camel and Pall Mall brands have a combined 17.8% market share. Lorillard's retail market share is nearly 15%, thanks to Newport's 12.6% market share. Although not all tobacco smokers will smoke legal marijuana, those that do may stick to their cigarette brand. So Newport marijuana cigarettes will have an advantage over some upstart brand. This gives tobacco companies a built-in advantage in the nascent market.

Moreover, tobacco companies can leverage their current infrastructure and distribution channels to dominate the marijuana market. Altria lists $4.7 billion in land, machinery, buildings, and equipment on its balance sheet (before depreciation). Reynolds' fixed assets exceed $2.5 billion and Lorillard's cost nearly $800 million. Tobacco companies have already made the huge investments in infrastructure required to manufacture and distribute cigarettes; all they would have to do to enter the marijuana market is change the ingredients. No other group of companies in the U.S. is better-suited to dominate the marijuana market, which is why Altria, Reynolds, and Lorillard can do so if and when it makes sense.  

Bottom line
Do not expect to find Marlboro Ms or Camel Cannabis in convenience stores any time soon. Hurdles involving federal legislation and product economics must be cleared before tobacco companies will enter the marijuana market. With a federal government that is content to allow marijuana experimentation to spread state by state, the first hurdle will not be cleared any time soon. Even then, it could be a decade or more before the black market disappears to allow legitimate operators to earn a decent return on capital. Although it could eventually dominate the market, big tobacco's marijuana fantasy is just a pipe dream for now.

Why I’m investing $117,238 in this one stock
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers