Consumer

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

How Pot Can Save Big Tobacco's Future

You wouldn't know it from their stock prices, but the U.S. tobacco giants are faced with the reality that their products -- at least the traditional kind, cigarettes -- are losing popularity. It's still a $90 billion-plus ultra-profitable industry that isn't going away, which is why investors continue to flock to it. But the smoking prevalence rate keeps falling, and at some point growth will become an issue. 

Altria and Reynolds American, which together sell the overwhelming majority of cigarettes in the U.S., have adjusted to the times by expanding into smoking innovations such as e-cigarettes. Meanwhile, they're benefiting from lower gas prices because a chunk of cigarette sales take place at gas station convenience stores, and consumers have more disposable income.

Last year's $26 billion merger between Reynolds and Newport maker Lorillard has also given the leaders more pricing power, a factor the companies cited in their earnings reports this week. On Thursday, Altria's first-quarter revenue (net of excise taxes) and adjusted profit beat analysts' average estimate, while earlier in the week, Reynolds reported earnings in line with expectations.

These companies still need a more sustainable growth plan, though. Lucky for them, a gigantic industry will soon be up for grabs: marijuana. There is a potential $45 billion of annual demand for recreational weed in the U.S. More and more states are moving toward allowing its sale, which will only build pressure on the federal government to legalize it. And that will open the door for the big tobacco companies to seize the marijuana market. It's a natural fit.

-- With assistance from Rani Molla

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

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net