Canada has this week become the second country in the world to legalise the recreational use of marijuana, creating a potentially lucrative new market in cannabis products for smoking, eating, drinking and vaping.

Tobacco and alcohol producers look best placed to make the move into the weed-related space, but there remain significant challenges to entering this market – not least of them determining the possible negative effect on brand equity.

Euromonitor’s “Seeing the Buds for the Weeds” report estimates that the Canadian legal marijuana market could be worth US$8bn by 2020, and in the US, where a rising number of states are legalising its use, it will be a $16bn market. Globally, by 2025, it could be a legal industry worth $50bn.

Cannabis is legal for medicinal purposes in at least 14 European countries, as well as Israel, Argentina, Puerto Rico, Panama, Mexico, Turkey, Zambia and Zimbabwe. And in the US, medicinal use is allowed in 29 states and the District of Columbia, with nine of these states having legalised both medical and recreational use of cannabis.

While the number of cannabis users worldwide is currently around a quarter of the number of tobacco smokers, in most markets the number of smokers is declining, and cannabis may therefore be a helpful string to add to tobacco companies’ bows.

There are also expectations of a tiered market for legal cannabis products, much like the premiumization in the alcoholic drinks markets.

In August this year, Constellation Brands, the third-largest brewer in the US, made a $4bn (C$5bn) move into the cannabis market through a stake in Canopy Growth, a Canadian supplier of medicinal cannabis products based in eastern Ontario.

The companies announced in a joint statement that Constellation, the maker of the Mexican-style Corona and Modelo brands, as well as Robert Mondavi wine and Svedka vodka, would acquire 104.5 million shares in Canopy, raising its stake to 38%.

Describing the investment as the “largest to date in the cannabis space”, the companies said it would enable Canopy to “establish global scale” in nearly 30 countries that are looking into allowing the use of medicinal cannabis, while “rapidly laying the global foundation needed for new recreational cannabis markets”.

The cannabis market is likely to be diverse, covering not only dried material for smoking, but also oils, cannabis-infused drinks, and edibles like cookies and candy.

Yet the route to riches in this sector is not without challenges, including a scarcity of supply as new suppliers – and consumers – seek out limited quantities.

Market Watch reports that “significant shortages” were to be expected from day one of legalisation in Canada, as licensed producers gradually increased production. There are also slightly different laws in each of the country’s 10 provinces, complicating the landscape for producers and consumers alike.

There is also a need for emerging cannabis brands to position themselves as responsible suppliers, with public education campaigns.

Canopy Growth has backed an ongoing Don't Drive High campaign in partnership with Uber and MADD Canada. "Don't drive high. Period. There are at least 101 better things to do instead.”

For existing brands in other sectors, such as alcohol and tobacco, there are also reputational issues to manage.

“Entry into legal cannabis would not be without legal, reputational or competitive challenges for a tobacco company but in this context there is – so to speak – more than one way to skin up a joint,” Euromonitor says.

Sourced from Euromonitor, MarketWatch, CBrands, Canopy; additional content by WARC staff