Altria Group (MO 0.82%) has had great success over the years, and much of the tobacco giant's strength comes from the brands that it has at its disposal. For decades, the Marlboro cigarette line has created great brand loyalty among smokers. More recently, with the company having acquired its smokeless tobacco operations less than a decade ago, Altria has doubled down on the popularity of its leading industry brand, Copenhagen.
Yet Altria's most brilliant move so far this year recognized the need to go beyond its established brands to acquire a patina of affluence among key customers. In that light, the tobacco giant's decision to purchase high-end cigar company Nat Sherman has implications that go well beyond the niche high-end tobacco market. In time, the purchase could take Altria in completely new directions and open up new avenues for growth.
Extending a pattern of performance
Altria has built up a reputation for aiming high with some of its non-core offerings. For instance, the Ste. Michelle Wine Estates division largely runs independently of Altria's overall corporate structure, and it aims at developing a high-end patina with its wine offerings. Critical acclaim and high quality are at least as important for Ste. Michelle as profit growth, and the winery has successfully sustained its quality despite being affiliated with a much larger corporate giant.
Still, that history didn't calm the nerves of Nat Sherman customers following the merger announcement. Many derided the high-end tobacconist for selling out, suggesting that Altria ownership would ruin the Nat Sherman experience. Yet over the first few months of its being an Altria subsidiary, Nat Sherman has shown no signs of having its quality degraded by the new relationship. Indeed, Altria CEO Marty Barrington said during the company's first-quarter conference call in May that it was only then getting started on rolling out its plans for Nat Sherman.
Altria investors can expect the exchange of information to flow both ways between Altria and Nat Sherman. On one hand, Altria fully expects that its superior distribution model will give more consumers access to Sherman products, enhancing the smaller company's ability to grow. Yet Altria also expects that Nat Sherman's executive and operational team will have things that they can teach their counterparts at Altria, and the larger company hopes to gain valuable knowledge that it can apply not just to Sherman products but to Altria's legacy businesses as well.
The value of the high-end consumer
From a competitive standpoint, Altria's purchase of Nat Sherman served another purpose. For the most part, Altria has lacked a highly visible strategy for serving the upper end of the tobacco market. By contrast, rival Reynolds American (RAI) has had dramatic success with its Natural American Spirit brand. Not only has Natural American Spirit carved out a respectable niche of the market domestically, but Reynolds was also able to persuade Japan Tobacco (JAPAF 0.79%) to pay $5 billion for the rights to distribute the product outside the U.S. market. Although many believe that Japan Tobacco overpaid for the rights, the price tag nevertheless indicates the value that global consumers put on U.S.-initiated products and brands.
More broadly, Nat Sherman will give Altria access to the production expertise that it needs to keep moving forward on all of its initiatives. Premium cigarettes will likely always remain a niche. However, reduced-risk product innovation relies on delivering a high-quality experience to customers, and the same expertise that allows Sherman to make ultra-premium cigars and cigarettes could also help it in designing effective alternatives to traditional cigarettes without sacrificing taste and satisfaction.
At this point, it's not entirely clear exactly how Altria will take full advantage of its acquisition of Nat Sherman. However, even without all the details being fleshed out, the purchase still qualifies as the most brilliant corporate move that Altria made during the first half of 2017. With such a promising future, it'll be up to Nat Sherman to take full advantage of the resources that Altria gives it to produce explosive growth for the benefit of all Altria shareholders.