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How Altria's Transforming Itself to Keep Its Lead

By Dan Caplinger - Jun 3, 2018 at 8:02AM

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Find out what the tobacco giant's latest strategic move is and why it's important.

The biggest challenge that tobacco giant Altria Group (MO -0.34%) has faced in recent years has been the secular decline in cigarette smoking. So far, Altria has been able to do a good job of boosting prices on its loyal customer base in order to offset the negative impact of sliding overall volume. But recently, the shift in interest away from regular cigarettes toward alternatives like e-cigarettes, vaping, and heated-tobacco units has forced Altria to consider more seriously the need to keep up with the pack in pursuit of reduced-risk products.

With longtime chief executive Marty Barrington having recently stepped down, now was a good time for new CEO Howard Willard to redefine the tobacco giant's philosophy and strategic thinking toward reduced-risk products. Altria announced a sweeping restructuring that it hopes will be able to bring the company closer to realizing the full potential of innovative tobacco products, and although investors haven't really reacted immediately to the news, the impact of the strategic shift could make or break Altria's future in the long run.

Altria logo on sign outside one of its facilities.

Image source: Altria Group.

Refocusing on innovation

During the new CEO's time as chief operating officer prior to his promotion, Willard had the responsibility of overseeing all of Altria's operating companies. That included not only the divisions that generated the lion's share of revenue and profits that kept Altria's current success intact but also the newer business lines that have the greatest potential for future growth. With a single person having to divide attention between those two very different strategies, the pace of innovation wasn't always as fast as Altria and its investors had hoped.

Willard's proposal will take the tobacco side of Altria's business and break it into two parts. The core tobacco division will consist of the Philip Morris USA cigarette business, the U.S. Smokeless Tobacco unit, Middleton cigars, and Nat Sherman premium tobacco products. Going forward, these units will report to tobacco products Senior Vice President Jody Begley, who in turn will have CFO Billy Gifford overseeing him.

Meanwhile, all of the reduced-risk products in Altria's current and prospective pipeline will fall under the jurisdiction of Nu Mark, which has been Altria's primary electronic cigarette brand. New Nu Mark CEO Brian Quigley will lead the innovative products business, reporting directly to Willard. The company will oversee not only the e-vapor and innovative inhalable products business but also oral nicotine-containing products, which will potentially include some forms of smokeless tobacco.

One interesting thing about the two divisions is who Willard has chosen to lead them. Quigley's experience has largely been in the smokeless tobacco and cigarette divisions, with the executive having led U.S. Smokeless since 2012. Conversely, Begley has been president and general manager of Nu Mark since 2015. Cross-pollinating these positions is an interesting way to ensure that the entire company shares insights across divisions.

Going for growth

In addition to those moves, Altria will also have a Chief Growth Officer position. This role will seek out the best growth opportunities in both traditional and alternative products, identifying consumer trends that it can then translate into product development ideas, as well as the subsequent marketing and consumer engagement once those products are available for the general public.

In particular, Altria wants to make sure it has the talent and resources it needs to remain atop the tobacco industry and push forward with innovative product development. That will work toward achieving what it calls its "aspiration of being the U.S. leader in authorized, non-combustible, reduced-risk products."

What's ahead for Altria?

Obviously, just having a corporate restructuring won't solve the problem of actually coming up with good products that people want to buy. But Altria's strategy does send a message throughout the company and to the broader tobacco industry that the Marlboro maker is serious about building out its capacity beyond traditional cigarettes and its other legacy products.

Going forward, Altria will need to squeeze as much value from its strategic move as it can. Only with success will the tobacco giant be able to evolve with the rest of the industry effectively.

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