Investors in Altria Group (NYSE:MO) have gotten used to how the tobacco giant has managed to make the most of a tough market, using its pricing power to squeeze more profit from revenue numbers that aren't behaving the way the company would like. Even as Altria explores alternatives to traditional cigarettes, it can't afford to ignore the need to make sure that key brands like Marlboro and Copenhagen still find ways to grow.
Altria recently talked with investors about its plans for the near future, and new CEO Howard Willard is looking to make his mark on the company. Here are five of the most important things that Altria's looking at right now as part of its broader strategic vision.
1. Altria has restructured to make reduced-risk products a higher priority
This is a dynamic time in the tobacco industry, and just as we lead in traditional tobacco products, we intend to lead in offering adult smokers more choices with innovative reduced-risk products.
-- CEO Howard Willard
The key to Altria's eventual survival in the company's view is to make a transition away from its traditional tobacco products toward reduced-risk alternatives that stand a better chance of avoiding the same levels of regulation and taxation that have plagued cigarettes. Back in May, Altria announced that it would change its corporate structure, creating a division designed to maximize results from its existing core tobacco business and another division to push Altria's innovation pipeline forward as quickly as possible. It's too early to see the results of that move, but going forward, Altria expects the movement of key executives into those new divisions to produce better performance than the previous corporate structure would have allowed.
2. Altria's cigarette strategy is holding its own
PM USA entered the year focused on stabilizing Marlboro with investments in product expansions, packaging innovations, and brand equity. We are encouraged with our progress in the first half, as Marlboro market share increased a 10th of a share point to 43.2% from the fourth quarter of 2017.
The Philip Morris USA smokeable products division is the key to Altria's current success, providing the vast majority of overall revenue and earnings for the company. Yet even the long-standing Marlboro brand had shown some signs of erosion recently, with competing products threatening to take away market share. Altria's response has been to take greater advantage of the Marlboro name while also seeking to renew its appeal for younger generations of smokers. A 10th of a percentage point might not seem like a lot, but given the ultra-competitive nature of the industry right now, that gain serves as a victory for Altria.
3. Smokeless tobacco evolves
USSTC submitted its modified-risk tobacco product application for Copenhagen Snuff in March, and earlier this month, USSTC submitted premarket tobacco applications for Verve discs and chews, innovative oral tobacco products that offer adult smokers a discreet choice to get tobacco enjoyment almost anywhere when smoking is not an option.
The products that Altria's U.S. Smokeless Tobacco Company division makes include the highly successful Copenhagen brand of chewing tobacco, and that brand has been gaining market share as the company focuses much of its marketing attention on its various lines of Copenhagen products. Yet even in the smokeless tobacco realm, appealing to reduced-risk customers has proven an essential part of Altria's strategy, and so new products are aiming not just at traditional users of smokeless tobacco but also at cigarette smokers who are looking for alternatives. Verve is one avenue for potential future growth, and Willard has high hopes for its eventual success.
4. Ready for iQOS
In heated tobacco, PM USA's initial lead market plans are ready, and upon FDA authorization, PM USA can begin importing iQOS into the U.S. While this will create a two- to three-month period between FDA authorization and availability at retail, PM USA will take advantage of that time to activate its marketing plan, which will use a range of tools to build adult smoker awareness and demand in the lead market while gaining key insights for subsequent market expansion.
Altria intends to benefit greatly from the experience that its partner Philip Morris International has gained from introducing its iQOS heated tobacco system into global markets, especially Japan. Philip Morris has had its greatest success in the Japanese market, where it started in a small number of test-market cities before gradually expanding to national scope. Altria intends to do the same thing if it can get FDA approval for marketing iQOS in the U.S., and while that might seem like a big if right now, the company hasn't hesitated to put itself in position to move forward as soon as it gets a go-ahead.
5. A long-term decline makes transition necessary
While industry performance may be volatile on a quarterly basis, over the past four quarters, the industry's rate of decline was approximately 4%, consistent with the long-term decline rate of 3% to 4%.
Altria doesn't have any illusions about the long-term viability of the traditional cigarette business, noting that the industry has been in decline for decades and will almost certainly continue to follow a similar trajectory downward in the future. Pricing power can mitigate the impact on the tobacco giant's bottom line temporarily, but Willard and his team know all too well that the company will have to find a new growth engine if it wants to avoid eventually fading into the sunset.
Keep your eyes on Altria
Altria faces substantial challenges, but it also has a lot of promising opportunities for growth. It's critical that the tobacco giant take advantage of alternatives like e-cigarettes and heated tobacco, as they have already reinvigorated an industry in decline and shown not only a way out but also a way up for Altria and its peers.