Pot Economics: Who Stands to Profit if Marijuana Is Legalized?

In late March, California Secretary of State Deborah Bowen set off a flurry of flapping jaws among the punditocracy when she announced that a marijuana legalization measure would be on the state's November ballot. The ensuing discussion covered a range of topics from medicine to morality, consumption to consequences, but few pundits considered the economics of California's move.

There is a huge market for marijuana; while it's impossible to determine how many Americans smokethe demon weed,the National Organization for the Reform of Marijuana Laws reports that there were almost 850,000 marijuana arrests in 2008. While staggering, this number represents only a small fraction of America's marijuana consumers. With a potential market of millions, decriminalization of marijuana could open the door to a vast, largely-untapped market for smoking paraphernalia, accessories, and other lifestyle accoutrements.

The Pot Portfolio

If California's legalization initiative passes, the first beneficiary will likely be the mainstream tobacco companies that already have a foothold in the smoking market. Most of the companies supplying rolling papers are privately held; for example, the Republic Tobacco company owns both Top and Job rolling papers, while Zig Zags, a French brand, is sold through National Tobacco. In terms of publicly-held tobacco companies, the biggest winner would likely be Britain's Imperial Tobacco Company (IMT). It owns Phillies cigars, a brand that is popular among cannabis consumers, many of whom empty out the cheap cheroots and re-pack them with marijuana. While Imperial declined to comment on this story, it seems likely that legalization could be a major boon for them.

Legalization would also be a shot in the arm to dozens of privately-owned firms that manufacture pipes, bongs and other devices often used for marijuana consumption. Many of these companies are small and undercapitalized, with minimal market penetration. As Dan Steinberg, CEO of Vapor Genie, notes, "If marijuana is legalized, we see the potential for significant growth in the smoking products industry. It will create a new market for our products. And of course legalization will attract investment that will fund further advances in smoking technology."

Vapor Genie, which produces a portable pipe that heats tobacco without burning it, currently has eight employees and sells its product on the Internet and through a network of privately-owned stores. For Steinberg, marijuana legalization in California could translate into a massive boon: "We are trying to sell our products in any available markets; California legalization could greatly expand our options."

Investing in small paraphernalia companies may seem a bit shaky for many investors; luckily, the marijuana smoker lifestyle offers a broad expanse of opportunities for even the most conventional stockholder. Cable providers like Time Warner Cable (TWC), Cablevision (CVC), and Comcast (CMCSA) could reap the benefits of a populace that wants to spend hours giggling at the television. The same could be said of Netflix (NFLX), which is increasingly expanding its inventory of movies that can be streamed over the Web.

And what of consumer electronics? After all, shows like the Discovery Channel's Shark Week -- a perennial favorite among the pot-smoking set -- looks even better in high definition, and last-generation DVD players can't really capture the transcendent wonder of the experience. Sony (SNE) or Phillips Electronics (PHG) could all reap massive benefits from legalization, particularly if they can figure out a way to combine a Blu-Ray Player and a nacho warmer.

Making Money Off of the Munchies

Speaking of nachos, marijuana famously goes hand-in-hand with Coneheads-level consumption of fat and carbohydrates, putting the snack food industry in a great position to reap the benefits of California's legalization move. In fact, it seems likely that marijuana users were a key demographic consideration when many recent food innovations were designed. While Dominos' (DPZ) recipe change (and advertising push) is clearly aimed at a broad spectrum of consumers, their competitor Pizza Hut (YUM) seems to be deliberately courting marijuana consumers. Late last year, the pizza behemoth decided to reintroduce its stuffed crust pan pizza, a dish that seems like a culinary Shangri-La for desperately hungry stoners.

Dominos and Pizza Hut declined to comment on this piece.

And what about the grocery store? Kraft Foods (KFT) and Pepsico's (PEP) Frito Lay have both recently released product lines that are designed to attract desperately hungry carb fiends. Doritos, a Frito Lay product, is touting a new tagline, "Prepare to take snacking to a whole new level." While not necessarily a nod to the cannabis-consuming populace, it isn't hard to see how the slogan could be attractive for people in altered states. For that matter, many of the company's latest offerings -- including All Nighter Cheeseburger, Tacos at Midnight, or Zesty Pizza and Ranch flavored chips -- seem designed by either cannabis consumers or pregnant women.

Frito Lay/Pepsi also declined to comment on this story.

And what of Kraft? While munchie classics like Cheez Whiz and Chips Ahoy cookies have long since placed the company in the pantheon of cannabis cuisine, these offerings pale beside the pot smoker wonderland that is the classic Oreo cookie. While Kraft refused to discuss this market segment, its snack food innovations seem tailor-made for carb fiends. Chocolate-dipped Oreos, Oreo snack cakes, Oreo "Fudgees," mini Oreos, white fudge-covered Oreos, Oreo wafer sticks...the list of stoner-ready Oreo snacks seems infinite. And, just in time to capture the tiny segment of the Oreo craving populace that was missing from its market, the company recently released "Oreo Sticks." Basically straws constructed out of Oreo cookies, these morsels enable consumers to slurp chocolate milk through chocolate cookies. While these may not have been designed by marijuana-loving consumers, it isn't hard to see how that particular demographic would be key to their popularity.

Not surprisingly, Kraft declined to comment on this story.

Ultimately, the ripple effect of legalization in California is almost immeasurable, and could work its way across vast segments of the economy. It is easy to make jokes about boosts in blacklight purchases and a spike in sales of Pink Floyd's Dark Side of the Moon, but the truth of the matter is that hundreds of companies stand to make a profit if marijuana becomes legal in California. From fast food restaurants to agricultural suppliers, newspaper publishers to convenience stores, it isn't hard to imagine the economic benefits of this move. Then again, with the promise of rich tax revenues from the sale of cannabis, the biggest winner may well be the state government of California. They could definitely use every penny.