Stocks in Rehab: Altria Group

Altria (NYSE: MO  ) needs to go to rehab. No, not because it’s come down with yet another hacking cough, but because its customer base is shrinking quickly.

Before I continue, the inner surgeon general in me must make an admission: The popularity of smoking is on a downturn because, duh, it's bad for you. From that perspective, of course, declining sales is a good thing. Nobody denies that. But the debate over the ethics of investing in cigarette companies isn't the topic of discussion today. Health risks aside, let's look at Altria purely from an investing standpoint, shall we?

Cigarettes’ waning popularity in the U.S. was part of the reason Altria shed healthier assets like Kraft (NYSE: KFT  ) and Philip Morris International (NYSE: PM  ) . Over the last year, Altria's Philip Morris USA saw sales volume fall 4.6%, and management expects overall sales to continue to decline around 3% going forward. Clearly, the U.S. is no longer the vibrant tobacco market it was in years past, so what has management done to combat declining sales? Well, it has pushed innovative, snazzy, and potentially healthier products in a drive to reignite growth.

Big, big mistake.

Altria's new products -- such as Marlboro Ultra Smooth cigarettes, spit-free chew, and a battery-powered unit that heats the tobacco rather than burning it -- have gone nowhere. This shouldn't come as much of a surprise. Consumer companies like Altria that derive success from brand-name recognition shouldn't be expected to excel outside their core competence.

Stick with what you know
Historically, when mammoth companies have ventured outside what they do best, the results haven’t been encouraging. Back in the '80s, Coca-Cola (NYSE: KO  ) came up with a plan to keep rivals like Pepsi (NYSE: PEP  ) in check: It invented a completely new formula -- dubbed New Coke (where were you, creative department?) -- to replace its original cola, which had gained so much love in the prior century. Surprise, surprise: New Coke failed miserably, and Coke finally surrendered to the naysayers and brought back its original formula.

What can the New Coke story teach Altria during this time of trouble? That it shouldn't underestimate the power of brand loyalty on specific products. People go gaga over $4 coffee at Starbucks (NYSE: SBUX  ) and drool over anything from Tiffany (NYSE: TIF  ) regardless of how gaudy it is, and Altria is the same way. It’s selling much more than a cigarette; it's selling a brand.

People don't buy Marlboros just for whatever pleasure they might derive out of smoking them -- they buy them because they've looked and felt the exact same way for as long as they can remember. When Altria starts throwing its name willy-nilly on products that will go nowhere quickly, it's threatening the one product that has made the company the best investment to own over the last 50 years.

The verdict
Altria, your rehab is simple: Come to terms with the idea that the success of your company has absolutely nothing to do with innovation, and everything to do with the strength of your brand name. Pushing new products in an attempt to win back a few customers is borderline desperate. Industry sales are declining, yes, but your best hope for a recovery is to intrude on competitors’ turf, rather than creating a new playing field.

For related, unfiltered Foolishness:

Kraft Foods is a Motley Fool Income Investor pick. Starbucks and Coca-Cola are Motley Fool Inside Value selections. Starbucks is a Motley Fool Stock Advisor pick. The Fool owns shares of Starbucks. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Morgan Housel owns shares in Altria and Philip Morris International. The Fool has a disclosure policy.


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