Altria Revises MLP Program

Flexible Option, Marlboro Leadership Price Option slated to begin in January

RICHMOND, Va. -- Philip Morris USA is revising, but keeping, its controversial Marlboro Leadership Price (MLP) option for the first half of next year.

Greg Mathe, spokesperson for the company, confirmed that the company had announced Marlboro Performance Options on Thursday, which include the MLP option and a Marlboro Flexible Option. "These voluntary options, the purpose of them, is to continue to support retailers that focus on Marlboro with additional promotional resources to accommodate various retailer strategies," Mathe told CSP Daily News. The new program will be effective from January 2012 through June 2012.

He said the company is in the process of sharing the details with retailers, and declined to comment further until that process is complete.

As previously reported in CSP Daily News, the program, in essence, asks operators to forgo part of their typical markup in exchange for incentives.

And while an October UBS-CSP Tobacco Survey found that 39% of retailers feel that MLP has helped Marlboro's share trends—up from 35% in a July survey--the program has not been without its detractors on the retail side. For example, one retailer's response to the survey: "It helped their sales but dropped my margin--sales didn't increase enough to compensate for the decrease in margin."

According to a report from analyst Nik Modi and associate analysts Benjamin Schmid and Russell Miller of UBS Investment Research, New York, the "Flexible Option" gives retailers an opportunity to align inventory, sales, pricing and signage with Altria's requirements or risk losing promotional funds.

MLP retailers who surpass the company's share targets on Marlboro also reportedly will earn additional incentives, according to the UBS report--with the share threshold being 60% for stores in California, New Hampshire, New Mexico, Texas and Wyoming and 55% for stores in all other states.

Citing the need to study trade documents in more detail, the UBS report says it is hard to understand the profit/loss impact. Other factors in understanding the impact included that the programs having "a lot of moving pieces," and the need to know how many retailers will participate and how competitors will react.

The report does conclude, however, that "if net money spent on these contracts is neutral (as it was with the original MLP program), we believe this will be a significant positive for Altria; however, if participation levels are high, it could have a direct impact on net price per pack trends."

The report also included another conclusion: "With today's announcement to retailers, it is clear the MLP program is here to stay."

Richmond, Va.-based Altria directly or indirectly owns 100% of each of Philip Morris USA Inc. (PM USA), U.S. Smokeless Tobacco Co. LLC (USSTC), John Middleton Co. (Middleton), Ste. Michelle Wine Estates Ltd. (Ste. Michelle) and Philip Morris Capital Corp. (PMCC). Altria holds a continuing economic and voting interest in SABMiller plc. The brand portfolio of Altria's tobacco operating companies includes Marlboro, Copenhagen, Skoal and Black & Mild.

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