Big Tobacco Harvesting Pot Maker?

BOSTON -- Addressing both its emerging heat-not-burn product and its stalwart Marlboro brand, an executive with one of the nation’s largest tobacco manufacturers discussed how the company will position itself for tomorrow.

Speaking to attendees at the Barclays Global Consumer Staples Conference, held Sept. 5-6 in Boston, William Gifford, vice chairman and CFO for Altria Group Inc., Richmond, Va., offered insights on a range of tobacco-related topics beyond its products, including consumer trends affecting the category.

Here are several of his insights …

Commenting on the general decline in cigarette volumes, Gifford said the traditional rate of 3%-4% can be explained in part by people trying electronic cigarettes. He said that within that declining percentage, 2%-3% can be attributed to “secular decline,” or people deciding to either quit or use other types of tobacco products.

E-cigarettes lie within that smaller segment. “You have to recall that in that 2% to 3% of people that are using other tobacco categories … you may see it in the smokeless category,” he said. “[However], that growth has slowed slightly as we experienced people trying e-vapor.”

He also noted the U.S. Food and Drug Administration (FDA) has a new focus on reduced-risk products. “As a matter of policy, [the FDA] announced it would encourage the creation of a market of noncombustible tobacco products to make it easier for smokers to migrate to less hazardous forms of tobacco,” Gifford said. “This has created a tremendous opportunity in the industry.”

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While the larger economy is moving in a positive direction, Gifford said the core tobacco customer seems to be falling behind that trend.

“You can see that with some of the discount churn that’s taken place,” he said. “So overall, discount has been fairly flat for a number of years; now it's right around 24% [of the category]. Within discount, however, you see a bit of a churn. So [regarding] branded, discount-cigarettes, as price increases are taking place, we see some consumers trading down to the lowest [priced product] in the store.”

For these value-conscious consumers, brand isn’t the concern, he said. “If you’ve been in the store and listen to them, truly, the way the consumer asks for the brand is, 'How much is your cheapest cigarette?' They don’t refer to it as a brand, but look at menthol and nonmenthol and then that exchange takes place. It’s really not brand oriented at all.”

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In terms of how the Marlboro brand has been faring, Gifford said he was pleased. “If you look at the first half [of the year] vs. fourth quarter of 2018, Marlboro is up 0.1%,” he said. “And you’ll recall that we talked about stabilizing Marlboro. And I just want to be clear what we mean by stabilizing, because sometimes people take that in different directions. We try not to look over a short period.”

Gifford said the company reviews four brand metrics: share, profitability, the demographics of the brand and what he called an “equity score.” He said he based his positive assessment across those four metrics.

One of the company's efforts at bolstering the Marlboro brand in 2018 included the expansion of Marlboro Ice, he said. “It has the resealable pack that consumers are giving [us] great feedback on,” Gifford said. “It is performing very well in the marketplace.”

He went on to note other efforts, including trade programs and a test of a “Points West” program in Texas, where consumers open a product’s flip-top box to reveal a unique code that they can log into to receive rewards. “What we’ve seen is a significant increase in unique logins, so more people are engaging with the brand,” he said. “And we think that leads to higher loyalty and a higher level of engagement with the brand through time.”

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In terms of its heat-not-burn product, iQOS, Gifford said Altria is ready from a marketing standpoint. With its arrangement with New York-based Philip Morris International to sell iQOS in the United States, Gifford said Altria could have product in the market within two or three months of receiving new-product approval from the FDA.

Regarding the actual marketing strategies, he said, “We’re going to invest the right amount of money to make consumers aware of it—to get them to try this product and eventually convert to the product.”

In determining which markets will see iQOS first, he said that state taxes will play a role. “We’ve had some success in three states,” he said, naming Connecticut, Kentucky and North Carolina. “Any product that comes out of the FDA with a [modified-risk] designation, we’ll have a reduced state excise tax associated with those [products].”

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