Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Rani Molla is a Bloomberg Gadfly columnist using data visualizations to cover corporations and markets. She previously worked for the Wall Street Journal.

Wine, chocolate -- pot.

If the estimated $45 billion or so of yearly demand for recreational marijuana is in the right ballpark, then more Americans crave cannabis than cabernet or candy bars. And as legalization efforts pull marijuana sales out of the shadows of the black market, an industry is, er, budding. 

Sales So High
Annual U.S. sales for a variety of vices
Sources: Euromonitor International, Marijuana Business Daily
Note: Candy data is 2015, while the rest is from 2014.

Right now, it's messy, shadowy and highly fragmented -- and the public companies involved in it are mere penny stocks. But as U.S. states increasingly move toward some form of legalization of the substance, that will change. In February, Alaska officially became the fourth state to legalize pot (with restrictions), following Colorado, Washington and Oregon, as well as the nation's capital. Some others have decriminalized it or allowed for medicinal uses and are inching toward a further loosening of the laws. In other words, states representing about half the country's population may soon allow for the purchase of marijuana in some form. It's tough to estimate the growth opportunity when the majority of weed sales still can't be measured, but consider the following map: 


If When marijuana consumption becomes legalized at the federal level (and leaving aside health and moral issues), Big Tobacco should stake a claim. Cigarette makers are grappling with declining numbers of smokers, especially in the U.S. The smoking prevalence rate among Americans in 2014 -- the latest available data -- was 17.4 percent, down from 21 percent a decade ago.

Burning Out
Share of U.S. population that smokes cigarettes
Source: Euromonitor International

Lower gas prices have helped tobacco stocks as of late because almost half of cigarette sales are made at gas-station convenience stores. However, the broader trend isn't moving in the industry's favor.


Even though consolidation has been beneficial to the tobacco industry, few large deal options remain. Last year, Reynolds American, the owner of Pall Mall and Camel, completed a $28 billion merger with Newport maker Lorillard. Now, nearly 80 percent of cigarettes are sold by just two companies in the U.S. -- Reynolds and the leader, Altria, which makes Marlboro. It's a level of market concentration unheard of in many industries. They've invested in new smoking alternatives such as electronic cigarettes and vapors, but those account for just a fraction of the giant tobacco market and their growth potential is unclear. 


The legal U.S. marijuana products industry "is so sizable now that consumer products companies can't ignore it," said Ken Shea, a food, beverage and tobacco analyst for Bloomberg Intelligence. Given the crossovers in manufacturing and marketing, as well as Big Tobacco's skill in navigating regulation and lobbying in Washington, "it's such a compelling opportunity for the tobacco companies to look at closely," he said. And in fact, they have -- roughly 40 years ago. Documents from the 1970s revealed that former executives at companies such as Philip Morris  began looking into both the threat of and opportunity in cannabis in anticipation of it becoming legalized by the U.S. government. Similarly, packaged-food companies, which are also looking for ways to grow and attract younger generations, could expand into edible cannabis products.

On this 4/20 -- the date on which the cannabis community celebrates its "version of Oktoberfest" -- the reality of marijuana joints in big brand-name packaging may still seem far away. But it's coming a lot sooner than you think. Companies doing the groundwork and getting ready to pounce will have a first-mover advantage. Tobacco has been one of the top-performing industry groups in the S&P 500 Index since the 1990s, and branching out into this space could give these stocks another breath. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Altria owns Philip Morris USA but spun off the international piece in 2008. While still separate companies, there's been talk of recombining them

To contact the authors of this story:
Tara Lachapelle in New York at
Rani Molla in New York at

To contact the editor responsible for this story:
Beth Williams at