Alcohol & Tobacco Recircle Cannabis - Part 1

Like it or not, the enemies [sic] are assembling at the cannabis industry gate.  It is debatable whether more Alcohol and Tobacco companies (A&T) in cannabis is a good thing but MSOs need to be mindful of the threats & opportunities and prepare accordingly.

This will be a two-party examination with part 2 coming later this week. 

Despite the abortive Constellation and Altria investments, A&T hasn’t walked away from weed.  Quite the opposite. The large, growing market plus low industry valuations make the sector too attractive to ignore, problems notwithstanding.

The issue has always been not if but when A&T steps up the plate, again. They have picked up the pace with new investments by BAT, The Boston Beer Co. and Altria. Moreover, the powerful Wine & Spirits Wholesalers of America (WSWA) published a strong op-ed urging Congress to federally legalize cannabis. And there’s the recently tabled PREPARE Act.
 
To enter the cannabis space, A&T can pull two available and powerful levers:

1) Strong balance sheets 
Today, large A&T companies can buy any number of cannabis firms – with cash.  And almost every cash-starved, valuation-battered cannabis producer will line up to be sold.  Earlier problematic cannabis investments will not turn off A&T.  They were small by Fortune 500 corporate finance standards and the write offs (though embarrassing) were easily manageable.  

On top of their access to capital is available IP.   A&T and pharma have created a piggy bank of patents and R&D that could be leveraged at a favourable time.

Many will foolishly revel in A&T’s early missteps.  However, this is a pyrrhic victory for cannabis incumbents.  A&T will draw lessons from these setbacks plus more years of market learnings to de-risk their next stage investments.

2) Regulatory capture  
MSOs should be careful what reform they wish for.  The WSWA’s announcement and the PREPARE Act are signals that A&T is mobilizing their considerable political clout to get behind serious (not piecemeal) legislation.  A&T lobbying will target a national regulatory framework that fits well with their existing business model (e.g., centralized production, independent 3rd party distribution).  If this happens, vertically integrated MSOs could be in a heap of trouble.

MSOs have their work cut out for them to avoid regulatory capture. However, they are divided and woefully underfunding their lobbying effort.

Calm before the storm
Though A&T is mobilizing I don’t see regulatory change in 2023.  These firms operate on multiyear planning cycles; It takes time to allocate capabilities and capital and find the right partners.  Part 2 will delve deeper into how A&T entry could happen and what MSOs can do about it. 

#tobacco #alcohol #safebanking #prepareact #legalization #msos # regulations #US