CHICAGO -- When Altria Group Inc. eventually spins off Kraft Foods Inc., its remaining Phillip Morris unit will be a pure-play tobacco investment for the first time in decades.
But despite a contentious and expensive litigation environment and increasingly restrictive regulations or, in many ways, because of them the tobacco company that remains is apt to sit astride its industry like a colossus for many years to come, according to a MarketWatch report. PM USA currently holds a 50% share of the declining but still enormous U.S. cigarette market [image-nocss] and has been busily acquiring and launching new products elsewhere to build its piece currently about 15% of a global business that is still growing, although at a slower rate than in years past, according to the report.
Those market-share numbers, along with the absolute dominance of its Marlboro are unlikely to move anywhere but up. With marketing regulations only getting tighter and the cost of entry always rising, its current competitors have enough trouble holding their own, and new ones aren't even on the horizon, the report said.
While it's not a done deal, Altria has made no secret of its desire to jettison its majority ownership of Kraft when the time is right. The precise moment has been the topic of breathless speculation by Wall Street analysts, much of it premature, as the ever-cautious and methodical company has kept its own counsel.
And Kraft is not the only entity the company is looking at breaking off: It is also examining the possibility of splitting the tobacco business into foreign and domestic units, according to MarketWatch. The two already have separate CEOs and provide their own investment presentations. And if many of the brands remain the same, there are stark differences in the challenges and opportunities faced at home and abroad.
No one at Altria would go on the record with MarketWatch to discuss current tobacco-industry trends or what a post-Kraft company might look like. But recent public remarks by top executives pull back the curtain a bit.
In the U.S., volume for essentially the entire industry is down, with the percentage of adults who smoke shrinking as more quit or die. And even those who continue to smoke often cut back, either out of economic necessity as the cost of cigarettes rises to above $8 a pack in some markets or because they have fewer and fewer places to light up.
In recent analyst meetings, Phillip Morris USA chief Michael Szymanczyk emphasized the company's market-share gains, court victories, the company's own anti-smoking efforts, and the development of new products like Taboka, a smokeless, spitless tobacco that's currently in test markets. At the same time, he acknowledged the ongoing volume declines down about 1% in the first half when adjusted for timing quirks.
The message from Phillip Morris International's CEO, Andre Calantzopoulos, has had a very different feel. The international unit boasted of volume growth of 6% to 804.5 billion smokes last year. Calantzopoulos can also talk of aggressive marketing efforts where permitted and growth in almost every single market outside of a few with unique problems, such as Germany and Spain.
All of these factors constitute a good argument for a further breakup, according to Gregg Warren, an analyst at Morningstar in Chicago.
"You could argue they could split the domestic from the international and just leave the domestic as a pure annuity for the states," he said, referring to the large sums cigarette companies pay to U.S. states under the 1998 Master Settlement Agreement. And even if American-style rules start to spread, as long as Phillip Morris International is already in a market, it could be a plus. "When you have these kinds of marketing restrictions in place, it is very difficult to develop a brand," Warren added.
Back to the U.S. side, there is little dispute that volumes will continue to decline and that the company is going to have to adapt. Morningstar's Warren said that "there will be some number where [the decline] halts, but I don't think anyone knows where it is."
He noted with approval the launch of Taboka, adding that "long-term they will probably end up buying UST [United States Smokeless Tobacco Co.]. That would be a good collateral move."Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.