Sometimes it takes a celebrity death to call attention to a longtime problem. That's what's happening after the death of San Diego Padres Hall of Famer Tony Gwynn, who died Monday from oral cancer caused by chewing tobacco. The former outfielder was just one of over 40,000 Americans who will be diagnosed with oral cancer this year, most of which contract the disease from smokeless tobacco products. Gwynn's death is shining the spotlight on the dangers of smokeless tobacco.
The negative publicity is bad for Altria Group (NYSE:MO) and Reynolds American (NYSE:RAI), which supply nearly 90% of the U.S. smokeless tobacco market. Smokeless tobacco has been a growth category for the industry, growing 5% per year from 2011 to 2013. The growth is partially attributable to the clampdown on cigarettes, which is pushing more smokers into smokeless products as it becomes increasingly difficult to light up in public and more expensive to buy cigarettes. Smokeless products also generate higher profit margins than cigarettes. A renewed push to regulate smokeless tobacco could put a damper on Altria and Reynolds American's fastest-growing and most profitable tobacco products.
Death shines light on dangers of smokeless tobacco
In addition to restrictions on public smoking, which are driving many to switch to smokeless tobacco, the habit is promoted by baseball players through a longtime tradition of chewing tobacco on the field. Teenagers often consider sports figures as role models, which may account for the stable 5% smokeless tobacco usage rate among American teenagers.
The prevalence of smokeless tobacco on the baseball diamond helped make the habit commonplace, though now it may help to make the practice obsolete. Gwynn's death from oral cancer has focused the public's attention on the dangers of smokeless tobacco, with calls for a ban on on-field chewing springing up around the league.
In an interview with Bloomberg, Harvard School of Public Health professor Gregory Connolly said he wanted the government to enforce cigarette-style regulations on chewing tobacco, including large warning labels and a ban on flavored products. These restrictions, combined with negative publicity from Major League Baseball, could turn the growing category into a declining one.
Altria and Reynolds American smokeless products
Altria and Reynolds American dominate the U.S. smokeless tobacco market, making them the companies with the most to lose from tighter restrictions on the category. In 2013, Altria captured a 55% smokeless share and Reynolds American captured 33%.
Altria's leading brands include Copenhagen and Skoal, the No. 1 and No. 2 premium moist snuff brands. Reynolds American's value-priced snuff, GRIZZLY, is the best-selling moist snuff brand in America; GRIZZLY's 30.1% market share edged out Copenhagen (29.3%) and Skoal (21.4%) for the top spot in 2013. However, Altria owns six of the ten best-selling smokeless tobacco SKUs, giving it the largest exposure to the category.
Although Altria and Reynolds American supply the vast majority of the U.S. smokeless tobacco market, neither is dependent on the category. Smokeless tobacco accounts for about 12% of Altria's operating profit and 13% of Reynolds American's operating profit. However, the category has provided volume growth in an industry where revenue growth usually comes from price increases.
In 2013, smokeless shipments increased by mid-single-digits while smokeable shipments decreased by the same amount. Moreover, both Altria's and Reynolds American's smokeless profit grew faster than smokeable profit, reflecting more shipments and higher prices.
Tony Gwynn's death from oral cancer could lead to tighter restrictions on smokeless products. Although Altria and Reynolds American derive less than 15% of operating profit from the category, smokeless tobacco has provided easy growth in an industry where growth is hard to come by. If regulators indicate that cigarette-style warnings and restrictions will be placed on smokeless tobacco products, investors may want to lower their growth expectations for Altria and Reynolds American.
Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.