High time the govt jumped on this smokin’ hot bandwagon
Can SA afford to be left out of a global trend for a product already produced locally in huge volumes?
There is an old investing adage that if you are at a party and someone tells you about a fabulous new stock that is growing like crazy, it is too late. You have officially missed the boat. If you try to board now, you will probably lose money.
So, I was at a party recently where I met a group of people among whom are some serious investors, and they couldn’t stop talking about Canadian marijuana companies. And I thought to myself, I really should invest in this.
Canada became the first G7 country to not only decriminalise marijuana but also to allow the commercial sale of pot for recreational use last year. Since then, things have gone pretty nuts. There are now a host of listed companies on the Toronto stock exchange which plan in one way or another to take advantage of this new revenue stream. The value of these companies has now exploded. The value of the top 10 companies is now around $23bn, or R337bn, a bit bigger than Standard Bank.
The market leader is Canopy Growth which has a market cap of $11bn. It was a modest producer of medical marijuana, but that has now definitively changed. Earlier this month Constellation Brands, a big drinks company which owns the Mexican beer Corona, invested $3.8bn in the company. The share is up 524% this year. One of its cute marketing ploys has been to affiliate its brand Tweed with rapper Snoop Dogg.
Why are investors going nuts about this? One of the problems with investing in pot companies is that nobody is absolutely sure how big the market is. But everybody knows it’s big, and potentially very big. The Canadians have looked at this and one polling company has estimated that Canadians spent roughly $4.8bn on marijuana in 2015, although the company does admit there is no real scientific way to measure illegal consumption.
That would suggest five million adult Canadians now use cannabis at least once a month, and it has been suggested that this will increase to 19% when marijuana is legalised. I think that suggestion is wildly wrong; it is larger now and will increase by much, much more.
But anyway, the Canadians are doing the change in a very Canadian way: all very organised and rational. All marijuana growers have to be registered and about 250 growing licences have been issued. It is going to be up to the provinces to decide who sells marijuana and how, but packets will have to be nondescript and have a health warning. No advertising will be allowed, and there will be an excise tax.
The funny thing is that nobody really knows what a marijuana bar should look like. The first will be opened around April next year, but already some of the designs have been publicised. Some look like neighbourhood pubs, with face-brick walls and long wooden bars, but some look all very modernistic and space-age, rather like Apple stores.
The other thing that people don’t know is how much and in what form marijuana will be consumed. Coke is apparently working on a marijuana health drink, would you believe, which will help muscle stress and assist with relaxation. Others are focusing on providing a recreational alternative to alcohol. It’s no accident that Constellation is getting involved; for booze companies, this change is potentially a big threat.
So if SA were to go the same route, how big would the market potentially be? And how much would the government get out of it? The Canadians are assuming revenue of $600m per year at an excise rate of 10% or so. With a population of just under 40 million, it might be possible to assume the SA government would earn R10bn a year. That would just about take care of free tertiary education for all.
The Constitutional Court this week decriminalised smoking dagga for adults in private. In order to do so, it utilised the privacy protection in the Constitution, arguing very logically that anything you do in your home which does not harm anyone else should generally be protected. It is a positive step, which you could argue took far too long.
The problem with founding the judgment on privacy is that the court itself cannot really go further. In fact it positively resisted going further, saying that marijuana trafficking was a serious problem that the government was right to curb.
Views will differ on this issue, but really it is up to the government now to decide where to go next. It is worth bearing in mind that two of SA’s neighbours have now also decriminalised pot – Swaziland and Zimbabwe. The efficacy of continuing to resist commercial production is open to question. Now that growing it in your garden is possible, the door has been prised a little further open.
But the bigger questions is this: can SA afford to be left out of yet another global trend for a product that is already produced locally in huge volumes?