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Stocks  | March 12, 2019

The marijuana industry is evolving at a rapid pace. Back in 1995, a mere 25% of all respondents in Gallup's annual survey were in favor of legalizing marijuana, and not a single U.S. state or country around the world had given the green light to cannabis.

Today, two-thirds of all respondents in Gallup's annual survey now favor the legalization of pot in the U.S., with 33 U.S. states having legalized the drug for medical purposes, and 10 allowing adult consumption. There are also two countries (Canada and Uruguay) worldwide to OK recreational weed, with more than two dozen medically legal countries.

As the industry evolves, so must the companies that operate within it and around it.

Traditional and Nontraditional Cannabis Players Are Evolving with the Cannabis Industry

For instance, dried cannabis flower has often been viewed as the most popular product of the cannabis revolution. But it's also been the easiest to oversupply and commoditize – at least in the states of Colorado, Washington, and Oregon, which were among the first in the U.S. to give the OK to adult-use consumption. As a result, growers in both the U.S. and Canada have shifted their production lines to include higher-margin pot alternatives (where legal). These include cannabis oils, vape products, cannabis-infused beverages, concentrates, sublingual sprays, and even edibles.

Vertically integrated dispensary operators in the U.S. have also had to get creative given the slow and arduous process of obtaining cultivation and processing licenses, as well as sales permits. Rather than waiting for their applications to be reviewed and potentially losing market share, vertically integrated dispensaries have been busy acquiring peers that have already gone through the process of obtaining licenses to save time.

Even nontraditional companies are adapting. DSW (NYSE:DSW), the designer shoe retailer, announced in January that it would be carrying nearly 55,000 units of cannabidiol (CBD) topicals from Green Growth Brands (NASDAQOTH:GGBXF) in 96 of its U.S.-based stores. CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits. DSW decided to push into CBD-rich topical creams, muscle balms, and body lotions after 74% of Green Growth Brands' Seventh Sense line of products sold in 10 of its DSW test stores over a 10-week period. As noted, since these are high-margin alternative products, DSW can reap substantial rewards while taking up minimal floor space, while Green Growth Brands gets increased exposure at a point when market share is still very fluid. 

Amazon Could Be a "Prime" Marijuana Player

Another company that's not currently a direct, or even ancillary, player in the marijuana industry, but could soon find itself with a prime role (pun intended) is (NASDAQ:AMZN). More specifically, Amazon's wholly owned subsidiary, Whole Foods Market, could carry marijuana products sooner than later.

Last Thursday, Feb. 28, Whole Foods co-founder and CEO John Mackey was hosted by the Texas Tribune for a conversation that would hit on a number of topics. One topic, which wasn't mentioned by the audience but was brought up by Mackey, was marijuana. When asked if Whole Foods would one day carry "alternative proteins," such as insects, Mackey took the opportunity to suggest that it was possible -- just as possible as Whole Foods one day soon carrying cannabis. 

Said Mackey, courtesy of The Boston Globe, "If cannabis is ever passed in Texas, chances are good that grocery stores will be selling that too. You just never what happens over time with markets. They change and evolve."

According to Marijuana Moment, Mackey has long been a supporter of the marijuana legalization movement. Back in 2013, Mackey voiced support for legalization in an interview with Mother Jones. 

Aside from simply aligning with Mackey's political views, carrying marijuana in Whole Foods stores would make a lot of sense. Whole Foods traditionally targets a more affluent clientele that's less resistant to economic hiccups that occur from time to time. Carrying high-quality cannabis and niche alternative products, which speaks to Whole Foods' emphasis on organic and natural products, would simply be an extension of what it already does.

For Amazon, it would be yet another step to keeping consumers within its retail sphere. Buying Whole Foods was, at first, a bit of a head-scratcher for Wall Street and investors. However, nearly two years after the purchase was announced, the logistics are making sense. Whole Foods gives Amazon access to more than 400 distribution nodes throughout the country and, more importantly, provides another means of keeping consumers in their universe, much in the way grocers build gas stations or content providers bundle television, internet, and phone packages. 

Amazon Would Have Plenty of Hurdles to Overcome before Becoming a True Cannabis Kingpin

But even with John Mackey supportive of Whole Foods carrying marijuana products in the future, and the CEO of cannabis delivery company Eaze, Jim Patterson, predicting Amazon would enter the cannabis space eventually, there are a lot of hurdles that the king of e-commerce would have to overcome.

The first issue, in case you've forgotten, is that marijuana is a Schedule I drug at the federal level, which means it's entirely illegal, prone to abuse, and not recognized as having any benefits. Although the federal government has been willing to take a hands-off approach to state-level legalizations, it has put its foot down in the idea of interstate transport of the drug. This would create somewhat of a logistical nightmare for Amazon, even with its expansive network of distribution centers.

Secondly, but building on the previous point, traditional logistics companies don't want anything to do with transporting federally illicit substances. Even with Amazon taking on logistic giants like UPS and FedEx, getting the product from its online website, or even from farm-to-store shelf, could prove challenging in some states.

And third, there's the big problem of convenience. The allure of Amazon's e-commerce platform is that you can manage your shopping needs from the comfort of your couch or bed. While online cannabis delivery networks do exist in the U.S., there's the uncertainty associated with ensuring that the product stays out of the hands of minors.

Make no mistake about it, having the king of retail enter the marijuana space would make a lot of sense, whether it's through its brick-and-mortar Whole Foods stores or via its e-commerce platform. But the logistics of making this move aren't as cut-and-dried as you might think. It would almost certainly take a federal legalization of cannabis, or at least sweeping reforms of CBD at the federal level, to fully get cannabis products in its physical and online stores.

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