The Marlboro brand is the centerpiece of Altria Group's (NYSE:MO) vast operations, and that makes many people forget that Altria also includes a wider range of products. In addition to other cigarette brands, Altria also has businesses that sell cigars, smokeless tobacco, e-cigarettes, and wine. On Tuesday, Altria acknowledged the value in expanding beyond Marlboro by announcing that it had purchased privately held Sherman Group Holdings and its Nat Sherman subsidiary. With the purchase, Altria hopes to boost its exposure to the high-end market, perhaps acknowledging the success that Reynolds American (NYSE:RAI) has had with its Natural American Spirit brand and seeking to come up with its own competitive answer.
What is the Sherman Group?
Sherman Group is the parent company of Nat Sherman, which sells super-premium cigarettes and premium cigars. Nat Sherman was founded in 1930 in the Garment District of New York City and remains family owned and operated. Sherman's manufacturing facilities are in Greensboro, N.C., and the company has put together a limited distribution network that extends across the U.S. market as well as in more than 40 countries internationally. A flagship store on 42nd Street just off Fifth Avenue in New York, shown above, also supports the company's prestige and upscale image.
Nat Sherman is proud of its heritage and the quality of its products. The company boasts 100% natural tobacco cigarettes, with a commitment to excellence and service. Moreover, its line of premium cigars are available at retail tobacconists around the world. The Sherman family remains the key to its operation, with son Joel and third-generation family members William, Michele, and Laurence remaining among the company's leadership.
Why did Altria buy Nat Sherman?
Altria's stated reason for buying Nat Sherman's parent company was simple. In the words of Altria CEO Marty Barrington, "Nat Sherman has a terrific brand portfolio which complements Altria's existing smokeable product segment." Barrington believes that the deal has plenty of upside for Nat Sherman as well, giving it access to Altria's expertise in retail distribution, brand management, and consumer engagement.
Neither Altria nor Sherman disclosed terms of the deal, but for its part, Sherman sounds pleased with the deal. Executive Vice President Bill Sherman commented, "We are excited to have our family's business join the Altria family of companies, [and] we believe Altria will be a great steward of the Sherman company and its brands."
Altria did reveal that one benefit of the acquisition will be to make the tobacco giant more competitive in the super-premium cigarette market. Sales have grown substantially during the past five years, and tobacconists widely regard Sherman's offerings as being in the same class as luxury brands like British American Tobacco's (NYSE:BTI) Dunhill.
What will Altria do with Sherman?
Predictably, some customers are already worried that being part of a corporate giant will hurt Sherman's reputation. Yet many people don't realize that Altria has holdings beyond its key Marlboro brand, because it tends to be relatively hands-off with its subsidiaries. The John Middleton unit's cigar business runs largely independently from the remainder of the business, and most of those following Altria believe that it will do the same thing with Nat Sherman. Allowing current Sherman management to keep running the business while taking advantage of Altria's financial, distribution, and talent resources could give Nat Sherman the best of both worlds.
Yet the big question for Altria is how far it wants to go with promoting Nat Sherman. On one hand, exclusivity has been a key to Sherman's success, and Altria won't want to overpromote the product and lose that cachet. Yet Reynolds American's Natural American Spirit has become a major player in the U.S. tobacco market, commanding market share of about 2.3% in the U.S. and finding interest overseas as well. Consumer appetite for "natural" cigarettes could give Sherman a new strategic direction to follow, but it would run the risk of watering down its luxury brand.
For now, few things should change quickly at Nat Sherman despite Altria's purchase. Over time, it will be interesting to see how the acquisition fits into Altria's overall strategic vision -- and how Nat Sherman changes in response to that vision.