RICHMOND, Va. — A focus on alternative tobacco options—everything from heat-not-burn devices to nicotine pouches—will fuel much of the forward momentum for Altria Group, according to officials from the Richmond, Va.-based maker of Marlboro, the nation’s dominant cigarette brand.
In its latest earnings call and during comments made at the recent Consumer Analyst Group of New York (CAGNY) meeting Feb. 19 in Boca Raton, Fla., officials talked about a range of issues, including cigarette trends and concerns about the company’s investment in San Francisco-based e-cigarette maker Juul Labs.
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State of smokables
During its Jan. 30 earnings call, the tobacco manufacturer reported net revenues of $25 billion, representing a 1% decline vs. 2018. Excluding excise taxes, revenues were $20 billion, an increase of 0.9% from the year before.
In its smokable-products segment, income grew by 8.6%, with margins increasing by 3.9% in 2019, officials said. Retail share of its Marlboro-branded cigarettes remained stable at 43.1%, although it was down 10% vs. the prior year. Product expansions with new resale packaging and other brand equity investments continue to support Marlboro’s performance, they said.
The Marlboro Rewards equity program launched nationally a year ago exceeded expectations, with more than 2.6 million adult smokers enrolled and 200 million pack codes entered since its launch, officials said. Mobile coupons are driving repeat purchases and remain the No. 1 redeemed item.
At the industry level, Billy Gifford, vice chairman and CFO of Altria, estimated that U.S. cigarette volumes declined by 4.5% in the fourth quarter and by 5.5% for the full year when adjusted for trade inventory movements and other factors. “We continue to believe that accelerated movement of adult smokers to other categories, primarily e-vapor, and increased exclusive e-vapor category usage drove the incremental year-over-year decline,” Gifford said.
For the full-year 2019, cigarette industry prices at retail increased by approximately 4%. “Given the recent regulatory and legislative developments in e-vapor and the national move to 21 as the legal age to purchase all tobacco products, we expect cigarette industry volume trends to remain dynamic,” Gifford said.
Taking these factors into account, Gifford projected full-year 2020 adjusted industry cigarette volumes to decline 4% to 6%.
Status of Juul investment
Moving to e-vapor, the subcategory experienced rapid growth in the first nine months of 2019, growing volume approximately 35%. The category’s growth was driven almost entirely by Juul, Gifford said. Late in the third quarter, news of vapor-related illnesses and deaths and the release of government survey data showing a significant rise in youth e-vapor use drove legislative and regulatory action. Several states moved to ban flavored or all e-vapor products. In the fourth quarter, the e-vapor category declined nearly 8% sequentially and growth slowed to 3% year over year. Also, in the fourth quarter, the company estimated Juul’s share of the market declined sequentially from 48% to 44%, Gifford said.
In preparing its quarterly and year-end financials, Altria performed a valuation analysis of its 2019 investment of almost $12.8 billion in Juul Labs. As a result, Altria recorded a $4.1 billion impairment charge—about a third of its original deal—to its Juul investment, primarily driven by the increased number of legal cases pending against Juul and the expectation that the number of legal cases against Juul will continue to increase. Since the last quarterly earnings announcement Oct. 31, 2019, the number of cases pending against Juul has increased by more than 80%, Gifford said.
“The latest impairment brings the current value of our investment to $4.2 billion,” Gifford said. “We’re disappointed in the performance of the past year and hope Juul can move forward more constructively.”
The news followed a move back in October, when Altria announced a write-down of $4.5 billion on its investment in Juul, recording it as a pretax charge against its third-quarter earnings, reports said.
Altria discussed its efforts to introduce its heat-not-burn device IQOS into the Atlanta and Richmond, Va., markets, which began six and three months ago, respectively. At the CAGNY event, Howard Willard, chairman and CEO of Altria, announced a third market, Charlotte, N.C., in which it will conduct similar activities.
Willard laid out the process of acquiring consumers, which included the steps of engagement, trial and purchase. Of consumers who engaged with the product, about 60% moved to trial, he said, while among consumers who tried the product, about 55% moved on to purchase.
A breakdown of the consumer demographics found 71% of Atlanta IQOS consumers were male and 43% were 40 to 59 years old. Thirty-one percent were 30-39 and 21% were 21-29, so more than half of IQOS customers were between the ages of 21 and 39, Willard said.
Turning to On, Altria’s new nicotine pouch line, Willard said that since completing the acquisition of the line last August, the company has started production in a new manufacturing facility in Richmond.
Willard described the facility as state-of-the-art and compliant with relevant U.S. Food and Drug Administration (FDA) standards. Altria expects to have annualized capacity of 50 million cans by midyear and 75 million cans by the end of the year.
Pricing, other news
Altria subsidiary Philip Morris USA initiated a list-price increase early in 2020 by at least 8 cents a pack, according to the Winston-Salem Journal. Two other manufacturers, Winston-Salem, N.C.-based R.J. Reynolds and Greensboro, N.C.-based ITG Brands, also initiated their own increases. Based on the tobacco makers’ move from two annual price increases to three last year, retailers believe the majors are likely to initiate three or possibly four price increases in 2020.
In other news, officials discussed the status of Altria’s regulatory compliance. Its teams have engaged with the FDA on the substantial-equivalence process for cigarettes and smokeless tobacco for a decade and, more recently, for its cigar business. Those discussions began slowly, but officials said they continued to work constructively with the FDA and have improved its success rate.