Cigarette-maker Altria Group (NYSE:MO) is best known for its Marlboro brand, which has helped keep the company in the top position in the U.S. tobacco market for decades. But Altria has several businesses beyond the cigarette market, and they haven't all performed as well as Altria's core business, especially as competition from Reynolds American (NYSE:RAI) and other players in the U.S. market have risen up to challenge the industry leader. In terms of sales and profit growth, Altria's least successful segment in 2015 has been its smokeless tobacco unit, and while it is still growing somewhat, the tobacco giant is looking for ways to bolster that business for 2016 and beyond. Let's look more closely at how the U.S. Smokeless Tobacco Company unit of Altria has lagged behind the rest of Altria's business segments and see what's ahead for the division going forward.
Altria's smokeless tobacco business
The U.S. Smokeless Tobacco Company has a long history that dates back nearly 200 years, but Altria's role in the company is quite recent. The smokeless tobacco unit didn't become part of the Altria portfolio until 2009, but it was a natural way for Altria to diversify beyond the cigarette market.
The company boasts its status as the world's leading manufacturer of moist smokeless tobacco, with top brands Copenhagen and Skoal helping to give Altria's segment a retail share of more than 55% in 2014. In the smokeless tobacco category, the company had six of the top 10 selling products, maintaining a solid lead over Reynolds American's Grizzly and Kodiak brands.
Smokeless tobacco has seen much of the same regulation related to health issues as the cigarette industry, with even the company's website noting that the U.S. Surgeon General and other public health authorities have determined that smokeless products are addictive and cause serious diseases. Yet the company works to remain responsible with its products, supporting cessation and running programs to reduce underage tobacco use while also supporting better supply-chain management and seeking to reduce the environmental impact of its business.
Why smokeless tobacco has lagged behind
So far in 2015, the numbers for Altria's smokeless tobacco business show some of the challenges it faces. Sales have grown just over 3.5% year-to-date to $1.39 billion, which is considerably slower than the 5% pace for Altria's cigarette unit. On a pre-tax operating profit basis, the growth disparity is even more obvious. Pre-tax profit of $830 million year-to-date is up about 3% from the first nine months of 2014, compared to overall company gains of more than 12% over the same timeframe.
Altria's approach to the smokeless tobacco business recently has closely resembled what it's doing with its cigarette business. In its October conference call, Altria CEO Martin Barrington talked about how higher pricing helped offset higher promotion investments and overhead expenses for the unit. Copenhagen in particular has been a success story, remaining the fastest-growing brand in the category. Skoal, on the other hand, has struggled, although Altria's investments in the brand have helped to slow the rate of decline in retail share for the brand. Overall, Altria hopes to keep positive momentum building over both key premium brands in the segment.
Moreover, Barrington thinks that the trend for smokeless tobacco in the long run is more promising than for cigarettes. He pointed out that historically the long-term trend has been a decline of 3% to 4%, but smokeless tobacco volume is trending back upward after a period of flat performance. The CEO believes that innovation in the industry through the introduction of e-cigarettes and vapor products has led to new interest for smokeless products as well, and Altria hopes to take full advantage of that going forward.
A small but useful piece of the Altria puzzle
Smokeless tobacco isn't critical to Altria's overall results, with sales representing just 7% of Altria's total so far in 2015. Yet with pre-tax profits adding up to 13% of the companywide total, you can see how the higher-margin smokeless business offers some advantages over the cigarette segment.
Altria made a strategic gamble with its acquisition of U.S. Smokeless Tobacco, but so far, that investment has paid off. Despite sluggish performance in 2015, smokeless products could see outpaced growth in 2016 and beyond.