For decades, Altria Group (MO 0.85%) has relied on the success of its Marlboro brand and other lines of cigarettes to power the bulk of its sales and profits. Yet the company has faced litigation, regulatory action, and consumer pressure from various groups about the health impacts of smoking. Now, a lawsuit from nearly 20 years ago has Altria and its domestic tobacco industry peers poised to launch promotional attacks on its own products.
That might sound like a key concession that could lead to the end of the tobacco industry as investors have known it. Yet Altria is more optimistic. The tobacco giant instead sees the move as helping it launch a new future for the company as it shifts its focus toward a more sustainable path forward.
Image source: Altria.
What Altria is doing
Altria said that it has agreed with British American Tobacco (BTI 0.20%) and other domestic cigarette companies about how to handle a court order against the industry. The court order requires the companies to publish five statements related to cigarette smoking in newspaper and television ads. The statements will always have to be present on company websites and on cigarette packaging for a year or longer.
The court order stemmed from allegations about the tobacco industry's behavior dating back to the 1950s. The federal government's lawsuit sought to recover billions of dollars in healthcare costs from Altria and its peers, alleging that the illnesses that smokers suffered resulted from their tobacco use. The court dismissed all of the government's claims except one, but it issued findings in 2006 related to the companies' behavior and ordered injunctive relief. For more than a decade, litigation has continued concerning the content of so-called "corrective statements" required by the injunction.
Why Altria isn't panicking
Those who haven't followed Altria closely might see the potential ads, which will inevitably discuss the negative impacts of smoking in graphic fashion, as a further death blow to an industry that has already seen huge secular declines in smoking. Altria, British American, and other producers have seen sales volumes drop steadily for years, and that trend is only likely to accelerate if the company themselves are promoting cigarettes' ill effects.
Yet Altria has seen the writing on the wall for a long time, and it's now taking the opportunity to use the ads as a way of showcasing its move toward alternative products. As Altria's general counsel, Murray Garnick, put it, "This industry has changed dramatically over the last 20 years, including becoming regulated by the FDA, which we supported. We're focused on the future and, with FDA in place, working to develop less risky tobacco products."
Altria has already had to adapt to changing conditions. The banning of cigarette billboards and advertisements in sports stadiums in 1998 further limited the tobacco industry's ability to market cigarettes beyond earlier restrictions on television ads. Within the past decade, the FDA has gotten much broader power to oversee Altria and its peers in their business practices. The result has been a greater commitment toward open communication about health impacts and support for efforts to help smokers quit.
Moving toward reduced-risk products
Altria also hopes that its efforts to find alternatives to cigarettes will pan out. In Garnick's words, Altria "remains committed to aligning our business practices with society's expectations of a responsible company," and that includes hopes that it can succeed in "developing potentially reduced-risk products."
So far, Altria has made substantial progress in a couple of areas. First, its MarkTen e-cigarette brand has gained considerable market exposure, with a majority of convenience stores and other high-profile sales channels featuring the product. Altria also hopes that the U.S. application for the iQOS heated tobacco system will gain FDA approval. Because of the success of iQOS abroad, Altria has high hopes that it can put the product to good use once it gets the go-ahead from regulators.
Altria has to hope that it can push customers from traditional cigarettes toward MarkTen, iQOS, and other alternatives. That's an avenue that wasn't available to the company even a few years ago, let alone when the lawsuit first came up. Few consumer advocates likely foresaw that anti-smoking ads could have the potential to be a driver of growth for Altria, but it's a definite possibility in the new industry environment.
Altria has faced challenges before, but few of them have forced the company to take such aggressive action against its own interests. Yet the tobacco giant is looking to align the court-ordered announcements as much as possible with its future strategic vision. If reduced-risk products are in fact the wave of the future in tobacco, then Altria might finally get the push it needs to commit fully to the innovative path forward for the industry as a whole.
