Cigarette stocks have gone through a lot of changes lately. Consolidation in the industry has concentrated power into just a handful of tobacco giants, and the power of popular brands like Altria's (MO -1.35%) Marlboro and Reynolds American's (RAI) Newport has gone up considerably. Yet the rise of e-cigarettes and vaping has forced cigarette companies to adapt, and brands like blu, British American Tobacco's (BTI -0.60%) glo, and Philip Morris International's (PM -1.03%) iQOS have gained immensely in popularity. Many see a future for cigarette stocks in which traditional cigarettes will play a fading role, but different companies are taking a variety of approaches toward facing the future.
Philip Morris: Embracing change
Philip Morris International has been the most aggressive in asserting the need for the cigarette industry to change direction. CEO Andre Calantzopoulos has said that he can envision a future in which traditional cigarettes will be a thing of the past, and he's aiming to have alternative products adopted in sufficient numbers by then so that Philip Morris can continue to dominate the industry for tobacco and related products indefinitely.
So far, Philip Morris' efforts have been impressive. The performance of the iQOS heated tobacco system in Japan has been tremendous, capturing high-single-digit percentage market share across the industry in just a couple of years in the island nation. Other test markets have also seen high adoption rates, and Philip Morris has plans to enter even more national markets in the near future. Although the regulatory environment for iQOS remains uncertain, Philip Morris hopes to gain approval from regulatory overseers across the globe for iQOS and other reduced-risk products, helping to usher in what it sees as a new era for the company and the industry.
Altria: Moving in multiple directions
Altria has taken a more balanced approach toward change in the industry, with plans to offer the maximum variety of tobacco products that include both traditional cigarettes and smokeless tobacco along with modified-risk products in the e-cigarette and related realms. The U.S. tobacco leader has made pacts with Philip Morris International to share research and development information on reduced-risk products, and Altria has also negotiated the exclusive rights to market the iQOS heated tobacco system in the U.S., planning to license the product from Philip Morris International if the U.S. Food and Drug Administration grants iQOS approval. Altria also has its own brands of innovative products, including Nu Mark's MarkTen e-cigarettes and the Green Smoke brand.
However, Altria doesn't get a substantial amount of revenue from its alternative products. Revenue from MarkTen goes into an "all other" catchall category, and in 2016, that category brought in just $96 million in revenue and posted a $99 million pre-tax operating loss. Traditional smokeable tobacco brought in $16.6 billion for Altria, showing the relative importance of the markets. So far, Altria doesn't seem committed to the future of reduced-risk products and instead has focused on its core tobacco strategy.
British American and Reynolds American: Joining forces
International tobacco company British American and U.S. No. 2 producer Reynolds American have had a long relationship. BAT took a 42% stake in Reynolds American when BAT's Brown & Williamson U.S. tobacco business merged with R.J. Reynolds in 2004. Toward the end of 2016, British American started talking about trying to acquire the remainder of Reynolds American, and earlier this year, BAT made an offer that Reynolds was able to accept.
Going forward, Reynolds and BAT hope that the merger will accomplish a number of positives. First, it will unify global distribution of key brands like Newport within a single corporate entity, which will hopefully produce some greater internal efficiencies. Yet more importantly from a forward-looking perspective, BAT and Reynolds will combine their efforts on the reduced-risk front, and that should help increase adoption of electronic cigarettes and other nontraditional products. Already, BAT hopes to fight against Philip Morris in Japan, with BAT's glo fighting the iQOS system. BAT expects that the post-merger company will have a division solely focused on next-generation tobacco products, and that should help it at least keep up with Philip Morris' efforts in the space.
Falling sales volumes of traditional cigarettes across the globe have put pressure on cigarette stocks. The best players in the industry are responding aggressively with plans to go forward in new and bold directions. Those companies that choose not to follow suit risk getting left behind and missing out on the key trends that will define the future of the cigarette industry.