Imagine how Coca-Cola (NYSE: KO) would feel if the FDA said Diet Coke would suddenly be known as Gray Coke or Coke Silver?
Well, that's kinda the position Altria (NYSE: MO) has found itself in with new FDA regulations banning tobacco manufacturers from using the "light" or "mild" monikers in their advertising.
So, say goodbye to Marlboro Lights and hello to Marlboro Gold. And while Altria says the name is the only thing that's changed, there may be more to come.
In its correspondence with Altria, the FDA has reiterated that "light" cigarettes aren't any safer for consumers, implying that the company shouldn't gain any advantage by branding its smokes as "light" or by rebranding and claiming that "your cigarette stays the same." With that in mind, the FDA wants to know how valuable the Marlboro Lights brand really is and has requested specific consumer research data regarding the old brand.
The FDA also wants to know what Altria has learned about the Marlboro Gold branding concept (i.e. could the new Marlboro Gold be even more powerful than Marlboro Lights?).
And to think, Altria enthusiastically supported FDA regulation of the tobacco industry.
An anniversary to remember
It's been one year since the FDA was granted authority over the tobacco industry, and the elimination of "light" and "mild" branding is just the beginning of the agency's plans. Fruit- and candy-flavored smokes were banned last year and smokeless tobacco products must now display larger health warning labels.
The FDA is also studying a potential ban of menthol cigarettes. Leading menthol manufacturer Lorillard (NYSE: LO), whose Newport brand smokes hold 35% of the menthol market, vows to fight the prohibition. From the beginning, Lorillard has been the loudest voice against FDA regulation of the tobacco industry, which isn't surprising since its Newport cigarettes comprised more than 93% of the company's sales in 2008.
In Marketing 101, the "4 Ps" (product, price, place, and promotion) are discussed widely as key to a product's success. The FDA has already threatened to take a bite out of the product itself. With increases in state and federal taxes, cigarette prices have risen dramatically. Cigarette distribution has been limited by last year's law, too: Tobacco vending machines are allowed only in adult-only facilities. Of course the FDA is now getting involved in promotion and packaging.
Up next: generic cigarettes?
OK, so it's not like the government can completely take away the brands that Altria and its kissing cousin, Philip Morris International (NYSE: PM), have worked so hard to build. But Uncle Sam and his global siblings can try to eat away at brand equity through efforts including a move toward mandatory "plain packaging" for cigarettes.
In particular, the United Kingdom is seriously considering legislation to ban colors or logos on cigarette packaging. This is one topic that Philip Morris and its main competitor, British American Tobacco (NYSE: BTI), can agree on. Philip Morris International has even set up a website outlining the reasons it is opposed to "plain packaging," including the rights it has built to its trademark and an increase in illegal trade of cigarettes. Philip Morris also says plain packaging won't cut smoking rates.
The FDA plans to announce its own tobacco packaging guidelines next year, with changes proposed to take effect in 2012. These changes could include banning or limiting color in cigarette packaging, which could be a big deal for tobacco makers who use color to differentiate their products from the rest of the pack (aka Marlboro Gold, which could become Marlboro Blands or Basic with the new generic packaging).
Now what?
As investors in Coca-Cola well know, strong branding can make or break companies' (and investors') growth prospects. Of all of the tobacco makers, including Reynolds American (NYSE: RAI) and Vector Group (NYSE: VGR), Altria has the most to lose in the near term, since no one has built a "light" cigarette with the same cachet as Marlboro Lights.
The long-term effect of the new rules on current and future smokers is unclear. While the FDA thinks that regulations will cut youth smoking rates, maybe the rules would influence teenagers to try the forbidden fruit (think of Prohibition). Either way, interesting times are ahead for the tobacco industry and its investors.
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