The COVID-19 outbreak has pushed the global economy into a recession. Amid the outbreak, many US states set social distancing guidelines. So, most businesses had to temporarily close their operations, which led to huge layoffs. The layoffs led to a decline in disposable income, which had a negative impact on the cigarette and cannabis industries. Generally, cigarettes and alcohol are considered to be recession-proof. However, a Bloomberg article on June 4 indicated that customers have been moving towards cheaper products.
COVID-19 impacts cigarette companies
As reported by Bloomberg, Vivien Azer of Cowen and Company analyzed the data for the previous 40 weeks. Her research indicated that customers moved away from the premium segment towards the deep-discount category. In those 40 weeks, the deep-discount category reported a growth of 4.2% YoY. The premium category saw a fall of 1.6%, while branded-discounts also fell by 4.7%. Azer blamed the economic fallout for the change in consumer preferences. Notably, the shift could impact Altria Group (NYSE:MO), which has lost some market share to cheap cigarettes in the last three years. So far this year, Altria has underperformed the broader equity markets. YTD, the company has lost 18.4% of its stock value, while the S&P 500 has only fallen by 3.7%. The headwinds from Altria’s investments in JUUL and Cronos Group (NASDAQ:CRON) have also dragged the stock down.
Read How Do Philip Morris and Altria Compare in 2020? to learn how Altria Group and Philip Morris are shaping up this year.
How did the cannabis sector fare?
The Bloomberg article also said that the cannabis sector witnessed a similar theme. Sensing customers’ needs, many companies, like Aurora Cannabis (NYSE:ACB) and HEXO, launched their value brands. Last month, Aurora Cannabis reported a better-than-expected performance during the quarter. The company’s management said that the launch of its value brand, Daily Special, was one of the reasons for strong sales. HEXO launched its value brand, Original Stash, in November 2019 to combat illegal sales.
Meanwhile, Canopy Growth (TSE:WEED), one of the prominent players in the cannabis industry, reported a weak performance in the quarter ended on March 31. The company’s management blamed its failure to understand customers’ needs for the weak sales. The company lost its market share to its peers. Canopy Growth failed to introduce its value brand as customers moved towards cheaper marijuana.
Cannabis sector’s YTD performance
The cannabis sector has also underperformed the broader equity markets. The Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) has fallen by 13.1% YTD, while the S&P 500 has declined by 3.7%. Weak demand for Cannabis 2.0 products, pricing pressure, rising operating expenses, and thriving black market sales dragged the cannabis sector down. During the same period, Canopy Growth, Aurora Cannabis, and HEXO have fallen by 18.0%, 43.2%, and 51.7%, respectively.