BOCA RATON, Fla. -- The potential of nicotine-delivery alternatives eclipsing cigarettes lies at the core of one of America’s largest tobacco manufacturers' road to future profitability, executives said during a recent analyst gathering.
Speaking at the Consumer Analyst Group of New York (CAGNY) meeting in Boca Raton, Fla., on Feb. 21, Marty Barrington, chairman, CEO and president of Altria Group Inc., Richmond, Va., and other executives named several broad strategies to ensure the company’s viability, at a time when the sale of combustible cigarettes continues a slow, steady decline in volume in the United States.
“We aspire to be the U.S. leader in authorized noncombustible, reduced-risk products,” Barrington said. “The range of tobacco products available in the U.S. is diverse when compared to many international markets, and different product platforms appeal to different U.S. adult tobacco consumers. That’s why we’re taking a portfolio approach, focusing on the three most promising platforms for U.S. adult tobacco consumers: smokeless tobacco and oral nicotine-containing products, e-vapor and heated tobacco.”
Two other Altria Group executives, COO Howard Willard and CFO Billy Gifford, further detailed the company’s strategies. Barrington reminded attendees of his announced retirement and said that as of May 17, Willard will step in as Altria’s next chairman and CEO, while Gifford will become vice chairman and CFO.
Here are a few highlights of the strategy outlined by the Altria executives ...
In terms of its cigarette strategy, Willard spoke about three specific areas:
- Products and packaging. Altria subsidiary Philip Morris USA (PM USA) recently expanded Marlboro Black Label into a two-state market. The premium-priced, bold, nonmenthol cigarette comes in what the company called a “contemporary, soft-touch” pack. In menthol, PM USA expanded Marlboro Ice nationally at the end of January. Marlboro Ice is a cool-finish menthol cigarette in a resealable pack, the first of its kind in the U.S. market, the company said. It’s a premium-priced product receiving marketing support to generate trial among adult menthol smokers.
- Trade programs. PM USA recently enhanced its retail-trade programs by reallocating resources from underperforming programs into those that better support Marlboro leadership, Willard said. He also announced a new loyalty fund that rewards retail partners for featuring Marlboro promotions through their store loyalty programs.
- Brand-equity and digital tactics. To build brand equity and increase digital leadership, PM USA recently launched a redesigned Marlboro.com webpage. The updated digital tools are more intuitive and mobile-friendly, offering a personalized experience based on an individual adult smoker’s behaviors and preferences, Willard said. Beyond digital, PM USA is conducting retail intercepts to highlight its products and promotions to adult smokers. PM USA is also investing in a new rewards program for Marlboro, which it’s currently testing in Texas as a limited-time “Points West” promotion. Adult smokers 21 and older can earn points by scanning unique codes printed on their Marlboro packs and redeem those points for gear, coupons and charitable donations.
2. Menthol and premium cigarettes
To continue to grow share in the menthol segment, PM USA recently expanded Benson & Hedges Menthol to 19 states plus Washington, D.C. This is a premium-priced product with a menthol taste and a refined package design, the company said. Retail intercepts in these markets will promote trial of Benson & Hedges among competitive adult menthol smokers.
To compete more effectively in the superpremium segment, Altria subsidiary Nat Sherman recently launched the repositioned Nat’s brand in Colorado. Willard said that after only 11 weeks in the market, Nat’s “achieved very strong share performance for a new cigarette brand.” He said the product also appears to be “sourcing competitive share in the segment. While it’s still early and we have much more to do, we’re excited about the brand’s promise.”
The company is also further implementing a technology it calls Revenue Growth Management (RGM), a tool the company declared successful for its U.S. Smokeless Tobacco Co. (USSTC) subsidiary. RGM uses analytics to tailor pricing, promotions and product assortment to specific geographies and store types.
Regarding cigars, Willard said Altria was “extremely pleased” with the performance of its John Middleton Co. subsidiary. The company’s Black & Mild cigars are a dominant brand in the tipped-cigar segment and grew volume nearly 11% last year. Going forward, Middleton plans to maintain strong volume growth by broadening Black & Mild’s distribution and increasing awareness through an expanded “Taste and Aroma” communications campaign.
In the smokeless subcategory, USSTC is taking a portfolio approach, with Copenhagen at the center, complemented by Skoal, Red Seal and a product the company classifies in the innovation category called Verve. Here’s the breakdown:
- Copenhagen, a smokeless-tobacco brand, grew a half-point in share in 2017 despite the company’s voluntary product recall last year. USSTC has plans to increase its potential through product news, equity-building programs and pursuit of a “modified risk” designation from the U.S. Food and Drug Administration (FDA), Silver Spring, Md. In late 2017, Copenhagen announced the availability of Weyman’s Reserve, which is a premium-priced, seasonal offering in response to adult dippers’ online voting and feedback. In addition, USSTC will expand Copenhagen Southern Blend across much of the western United States. Southern Blend is a premium-priced product made with 100% American-grown tobacco that is dark-fired and barrel-aged. To further its harm-reduction goals, USSTC plans to file a modified-risk tobacco product (MRTP) application for Copenhagen Snuff.
- Skoal also plays an important role in USSTC’s harm-reduction strategy. USSTC has been growing Skoal’s profitability while investing in blends and snus. In the next few months, USSTC plans to expand Skoal Spearmint Tobacco Blend Pouches, a seasonal offering with a mint flavor. And during the second quarter, USSTC will update packaging on Skoal Snus with a slim, clear-bottom can, differentiated from traditional moist smokeless tobacco (MST) packaging.
- Verve is an innovative, oral nicotine-containing product designed to appeal to a diverse set of adult smokers, including women, many of whom reject MST and snus, the company said. Following encouraging market results, USSTC is expanding the sale of Verve Discs into two more markets in the second quarter, testing different combinations of retail and e-commerce sales strategies. USSTC also plans to file premarket tobacco product applications (PMTAs) for Verve Discs and Chews later this year.
5. Electronic vaping
Altria subsidiary Nu Mark has a vaping portfolio that includes "cig-alikes," closed-tank products and access to additional e-vapor technologies through a minority interest in Avail Vapor, Richmond, Va.
In cig-alikes, MarkTen is available in about 65,000 stores, representing roughly 70% of U.S. e-vapor volume in mainstream channels. In 2017, MarkTen grew volume by about 60%. MarkTen Bold, which is in about 25,000 retail stores, uses a proprietary recipe of nicotine salts with 4% nicotine by weight, the company said. Altria plans to file PMTAs for MarkTen this year, with MRTP applications to follow.
In the closed-tank segment, MarkTen Elite is a pod-based product with a premium, sleek battery design. Its e-liquids and vapor volume “provide a balanced, satisfying experience with the convenience of prefilled, magnetic click pods. And MarkTen Elite’s pods contain over twice the liquid volume of [San Francisco-based] Juul’s [vaping device],” Willard said. Over the past several months, the Juul device has taken a leading market share in the closed-system vaping category at c-stores. Over the next few weeks, Nu Mark will expand MarkTen Elite in five flavors into over 6,000 stores, with further expansion planned for later in the year. Nu Mark is also testing several other closed-tank products in 2018.
6. iQOS update
For heated tobacco, Gifford expressed excitement for its partnership with New York-based Philip Morris International (PMI) to bring iQOS, PMI’s “heat-not-burn” device, to the U.S. market, pending regulatory authorization. The iQOS device and accompanying heat “sticks” offer a sensory experience and nicotine satisfaction similar to combustible cigarettes, but it produces no ash and less odor, the company said. The FDA is reviewing PMTA and MRTP applications for the iQOS device and three variants of Marlboro-branded heat sticks.
“Of course, we’re not just waiting,” Gifford said. “PM USA has been preparing for commercialization and is ready to act promptly upon FDA authorization.”
Gifford said PM USA plans to launch iQOS into an initial, unnamed market to “learn as much as possible as quickly as possible and make the most of our first-mover advantage in heated tobacco.”
The company plans to test a range of marketing, sales and consumer-engagement approaches to raise adult smokers’ awareness of iQOS, facilitate guided trial of the product and provide post-purchase support, Gifford said, emphasizing that they would take steps to limit reach to unintended audiences.
New York-based CAGNY connects investors, management teams and the media dedicated to the consumer industry through events, including this conference in Florida.