Altria's Premium Focus

CFO shares company's premium strategy at Barclays conference

BOSTON -- While competitors might focus on discount cigarette brands due to economic conditions, Philip Morris USA believes long-term cigarette segment growth is built on premium brands.

Howard Willard, executive vice president and CFO of Altria Group Inc. (parent company of PM USA), told attendees at Barclays Capital 2011 Back-to-School Consumer Conference in Boston that in the 1990s, PM USA and competitors built large discount brands. "These efforts were largely unsuccessful in the long term, because as soon as manufacturers increased prices on these brands, their low price positioning was undermined, and their retail shares quickly declined," he said.

The company's focus on growing Marlboro has enabled the company to maintain a high premium volume mix compared to principal competitors, with premium branded products representing 94.3% of PM USA's cigarette shipments in the first half of 2011.

Willard also said that the company is willing to accept short-term negative year-over-year retail share comparisons, rather than focus on growing premium brands like Marlboro on higher levels of promoted share.

Marlboro achieved record retail share of 42.6% in 2010, but the growth was stronger than planned due to an "attractive introductory offer" on Marlboro Special Blend. "While PM USA believes that some level of price promotion activity is necessary to build Marlboro's brand equity and create news, it does not believe that building Marlboro on price promoted share is necessary or appropriate to maintain the brand's equity."

Willlard added that PM USA's objective in cigarettes it to balance income growth with Marlboro's share growth. "PM USA balances these two objectives over time, rather than focusing on quarter-to-quarter income and share results that may fluctuate on a short-term basis, due to the timing of Marlboro's new products and brand-building initiatives, as well as competitive activity and trade inventory dynamics."

Willard also spoke of Altria's other offerings:

Smokeless. Copenhagen and Skoal's combined 2011 first-half retail share increased one share point from the first half of 2009, and their combined 2011 second-quarter retail share increased 1.4 share points vs. the fourth quarter of 2010, with new product introductions in both being a contributing factor. Again, a premium pricing strategy emerged, with Willard saying Copenhagen's second-quarter average retail price per can was $4.17, representing a 44% price premium vs. the next largest competitive brand.

Cigars.John Middleton Co. also focuses on its premium brand, Black & Mild. One opportunity Willard identified for Black & Mild is in the untipped cigarillo segment, with the company expanding Classics and Sweets varieties. The company also plans to introduce Black & Mild Wine to the segment later this month.

While there is intense competition in the machine-made large cigar category, Middleton responded with promotional investments in Black & Mild's marketplace position. "These investments, new product introductions and other brand-building initiatives contributed to Black & Mild's 2011 first-half retail share growth of eight-tenths of a point," Willard said.

Altria directly or indirectly owns 100% of each of PM USA, U.S. Smokeless Tobacco Company LLC, John Middleton Co., Ste. Michelle Wine Estates Ltd. and Philip Morris Capital Corporation. Altria holds a continuing economic and voting interest in SABMiller plc.

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