While analysts dissected Turning Point Brands' (TPB) Q1 2024 earnings call, fixated on Zig-Zag's resurgence and the promising FRE rollout, a subtle yet potent revelation went largely unnoticed. Buried within the transcript lies a hint of a powerful synergy at play, one that could propel TPB to a commanding position in a $2 billion market largely off the radar of traditional tobacco investors.

That market is the burgeoning 'alternative channel' – a universe of smoke shops, head shops, and increasingly, cannabis dispensaries. It's a world fueled by the ongoing normalization and legalization of cannabis, where consumers are actively seeking high-quality accessories and innovative products that go beyond traditional tobacco.

TPB's management team has quietly but strategically focused on penetrating this channel, and their success is nothing short of remarkable. Zig-Zag, traditionally known for its rolling papers, is leading the charge, experiencing a staggering 60% year-over-year growth in its alternative B2B business during Q1. This acceleration builds upon the momentum witnessed throughout 2023, indicating a sustained and potentially exponential trend.

What's truly fascinating is the dual engine driving this growth. It's not simply about new stores opening up; it's about TPB maximizing its presence within existing outlets. Summer Frein, Chief Revenue Officer, highlighted that a significant contributor to the 60% growth was the expansion of product portfolios within existing alternative channel stores. This reveals a key insight: TPB is actively educating and converting these retailers, demonstrating the value of a more comprehensive Zig-Zag product offering.

Consider this: Many competitors in the rolling paper and accessories space offer a limited range of SKUs. TPB, on the other hand, is leveraging the breadth of the Zig-Zag brand, offering not just papers and cones, but also wraps, cigars, accessories, and even apparel. They are transforming from a mere supplier to a true solutions provider, catering to the evolving needs and preferences of the alternative channel consumer.

But the synergy goes deeper. It extends beyond Zig-Zag to encompass TPB's newest star, the FRE modern oral nicotine pouch. While the focus is undoubtedly on a traditional convenience store rollout, Graham Purdy, CEO, subtly revealed that FRE is experiencing demand within the alternative channel as well. This might seem counterintuitive at first – why would a modern oral product thrive in stores that may not even carry traditional tobacco?

The answer lies in TPB's ability to recognize and leverage cross-channel consumer trends. The modern oral category is rapidly gaining traction among a diverse consumer base, and those frequenting alternative channel stores are no exception. TPB is demonstrating a remarkable ability to identify these trends and translate them into sales opportunities across its portfolio of brands.

Zig-Zag's Alternative Channel Growth

The chart below illustrates the remarkable growth of Zig-Zag's alternative B2B business, based on information provided in the Q1 2024 earnings call and assuming a continuation of the 60% year-over-year growth rate.

To quantify the potential of this unseen synergy, let's delve into some numbers. The alternative channel, driven by cannabis normalization, is a multi-billion dollar market with immense growth potential. Assuming a conservative 5% share of this market, achievable through continued penetration and portfolio expansion, TPB could generate an additional $100 million in annual revenue from this channel alone. This represents a significant addition to TPB's current $400 million revenue base, and importantly, this incremental revenue would come with higher margins due to the premium positioning of Zig-Zag and FRE within the alternative channel.

The hypothesis is clear: TPB is strategically positioned to become a dominant player in the alternative channel, leveraging the synergistic power of its brand portfolio and its distribution expertise. While the market may be focused on the traditional tobacco landscape, a closer look reveals a compelling story of unseen growth and untapped potential, one that could redefine TPB's future and significantly enhance shareholder value.

"Fun Fact: Zig-Zag rolling papers have a rich history, dating back to 1879 in France. The iconic man on the Zig-Zag logo is named 'Le Zouave,' a French soldier known for his distinctive uniform."