Altria (MO 1.61%) is a giant in the cigarette business, with its iconic Marlboro brand holding a huge 42% share of the North American cigarette market and a 59.4% share in the premium space. In many ways, the company is an industry leader. And yet, when you look at the numbers, you start to see that Altria is also the industry laggard. It is Altria's own fault -- here's why.
Altria's market position versus its shrinking volumes
It is pretty clear that Altria is a big player in the North American market. But there are some important caveats to consider here. For starters, the Marlboro brand made up roughly 89% of the company's cigarette volume in the second quarter of 2024. So, for the most part, Altria is a one-trick pony. That's not a good thing, even though that pony is, for now, very attractive.
Image source: Getty Images.
The Marlboro brand saw volume decline 11.8% year over year in the second quarter of 2024. Volume fell 10.4% in the first half of the year. And Marlboro volume was off by 8.8% in 2023. This isn't a one-year problem for the tobacco company, it is the continuation of a long-term trend.
To be fair, Marlboro is doing better than the company's other brands. Weakness in the rest of its brand portfolio led to a 13% year-over-year volume decline in the company's overall tobacco business in the second quarter of 2024, an 11.5% drop in the first half of the year, and a decline of 9.9% in 2023. Again, that's just the continuation of a long-term trend.
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Key Data Points
There's no sign that this trend is slowing down, noting that the volume declines so far in 2024 are worse than the decline seen in 2023. Altria has been offsetting the volume decline with price increases, which has allowed it to protect its revenue and support a growing dividend. But it can only raise prices so much before it hits a tipping point and the price increases end up exacerbating the problem.
Altria is sleeping in the bed it made
Altria is trying to find new ways to grow its business, most recently buying the NJOY vaping brand. Plugging that upstart's product into its massive distribution and marketing network has led to swift growth at NJOY. That's to be expected. But NJOY is still so small that it falls into what amounts to an "other" category on the income statement. It's not even a rounding error, with the "other" category representing less than 0.2% of the company's second-quarter sales. The success that Altria is seeing with NJOY is good news, but that still doesn't make it particularly meaningful financially.
The real problem here is that Altria set all of this up. And cigarette volume again tells an important story. Competitor British American Tobacco reported a year-over-year cigarette volume decline of 6.9% in the second quarter. Philip Morris International (PM +0.34%) managed to grow its volume by 0.4% in the quarter.
The big difference between Altria and these two companies is that Altria only operates in North America. It is, pretty clearly, the least desirable cigarette market. And that was management's own decision, since it spun off Philip Morris International so it could focus on what is now the worst market for its most important product. Worse, Philip Morris International is now a key competitor in non-cigarette businesses in the domestic market. So not only did Altria choose to focus on the most difficult market, it also created a new competitor along the way. In hindsight, jettisoning the international business looks like a huge strategic mistake.
Altria's list of mistakes is longer than the Philip Morris International spinoff
If that were the only strategic mistake Altria had made, you might be able to forgive the error. But the company also ended up writing off billions of dollars following soured investments in vape maker Juul and a marijuana company. Although NJOY appears to be doing relatively well, Altria's history with important strategic efforts is not a good one. And it all goes back to the decision to spin off Philip Morris International, which helped to put the company into the disadvantaged industry position it is now struggling to get out of. Long-term investors should tread cautiously here; management's track record isn't very good.
