LAKEVILLE, Minn. — According to the Tobacco 21 website, more than 425 cities and counties in 25 states have passed local laws that increase the legal age of purchase for tobacco and noncombustible nicotine products such as e-cigarettes from 18 to 21. Not unexpectedly, 2019 has seen a continued effort to introduce and attempt to pass similar legislation at the state level, and rumors about it happening in Congress.
Make no mistake: Passing laws of this type at the city and county levels is much easier to do than at the state level. First, every state except Nebraska has a bicameral legislature, a committee process in both houses, and a central database where legislation and the legislative process is available to all in a timely fashion. Also, bill introductions are reported, amendments and votes are recorded and committee hearing schedules are posted with enough opportunity for interested parties to be heard. The National Association of Tobacco Outlets (NATO) continues to oppose these bills and is making a serious effort to reach out and ensure that our voice—on behalf of more than 60,000 retail stores across the country—is being heard.
The 27 states that have had bills introduced this year to raise the legal age to purchase tobacco are Arizona, Arkansas, Connecticut, Hawaii (to raise the age higher than the current 21 years requirement), Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Nebraska, New Hampshire, New Mexico, New York, North Dakota, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia (passed into law), Vermont, Washington and West Virginia.
Perhaps the most significant reason that that these bills prove to be a much higher mountain to climb at the state vs. local level is that all states tax cigarettes and most tobacco products and rely upon tobacco tax revenue to fund their governments. While some larger counties and cities (for example, Chicago and New York) may tax these products, most do not have legal authority to tax the products. Because states are required to balance their budgets, legislative proposals that result in less state revenue are generally more difficult to pass than other bills.
NATO decided through our internal committee and board of director discussions that the association would continue to oppose these bills because rather than necessarily reducing access to these products by minors, the bills are more likely to simply change buying patterns by adults. Additionally, adults should have the right to decide what legal products they purpose because they can join the military, marry or take out student loans for college, and make personal decisions about their healthcare.
These bills are not all identical and many can be distinguished from one another in looking at how they treat possession of tobacco products by underage persons differently. National surveys already demonstrate that more than 86% of underage youth acquire cigarettes illegally not from licensed retail establishments, but rather through social sources such as friends, family and even strangers. That number is even higher—more than 89%—for underage youth acquiring e-cigarettes. Retailers are committed to complying with the law and preventing underage access to tobacco products.
As states continue to consider these proposals, NATO will continue to work to ensure that the perspectives of retailers are heard.
RICHMOND, Va.— Altria Group Inc. executives gave several strategic insights during their investor call last month, including plans for alternative nicotine delivery and marijuana. The tobacco company's top executives also related how Altria will address the U.S. Food and Drug Administration (FDA) as it increases its pressure on flavored products.
During the Jan. 31 investor call, Altria leadership reported stable results, with fourth-quarter revenues unchanged from 2017 numbers at $6.1 billion and year-end 2018 net revenues declining 0.8% to $25.4 billion. Higher revenues in smokeless products partially offset lower revenues in combustibles, they said.
Officials also talked extensively about Altria's multibillion-dollar investments in e-cigarette maker Juul Labs and cannabis producer Cronos Group, touching on “dual” or multiproduct tobacco consumers and the company’s U.S. heat-not-burn strategies.
“Altria enters 2019 with an evolved business platform that includes our strong core tobacco businesses and new strategic investments with tremendous potential for growth,” said Howard Willard, chairman and CEO of Richmond, Va.-based Altria.
Here’s a review of the more surprising revelations …
Altria closed out 2018 with 17.7% earnings per share (EPS) growth, returning to shareholders $5.4 billion in dividends. Subsidiary Philip Morris USA “stabilized” its signature Marlboro cigarette line and positioned itself for long-term success with investments in San Francisco-based Juul and Toronto-based Cronos.
Citing her retailer survey results, Bonnie Herzog, managing director of consumer equity research at Wells Fargo Securities, said Altria’s full-year retail share of 43.1% was aligned with fourth-quarter figures for 2017, and were attributed to “improved focus, a robust loyalty program and effective [promotion].”
For 2019, Altria predicted in its guidance statements an EPS range of $4.15 to $4.27, representing a growth rate of 4% to 7%. Officials based the predictions on expected tax adjustments; a higher interest expense from the Cronos Group and Juul transactions; savings from a cost-cutting program; and increased investments related to Philip Morris USA’s launch of iQOS, once that product receives the proper FDA approvals.
With Altria’s $12.8 billion purchase of a 35% investment in Juul last December, Willard said the brand will continue to be a primary growth driver for the e-vapor category, which he expects will see 15%-20% growth in volume annually.
The larger promise will come from international sales, which Willard said will be “as large or larger” than the U.S. market. He cited two examples to back his optimism. First, in Canada, where distribution is limited, Juul reports that retail takeaway grew to more than 60% dollar share in stores selling its products after only three months at retail. Juul is also seeing encouraging performance where it has achieved distribution in Europe.
At the Sainsbury Chain in the U.K., officials said, Juul recently became the No. 1 e-vapor brand in the chain, with a dollar share in excess of 23% less than 12 weeks after launch.
“Under our assumptions, our investment in Juul would generate an after-tax return exceeding our weighted average cost of capital in 2023,” he said.
When delving further into the drivers behind e-cigarette volume growth, Willard pointed to people converting completely from cigarettes to e-vapor along with a substantial amount of users still deciding whether to use both combustibles and e-cigarettes. That segment of customer may be considered dual users.
The reported 4.5% decline in cigarette volumes for 2018 is above the historic 3%-4% decline due to higher gasoline prices, he said. “So I think it shows you that the cigarette-category decline rate is pretty persistent and it can withstand a fair amount of growth from e-vapor,” Willard said. “So we continue to be very comfortable with our forecasted decline rate of the cigarette category over the next five years of 4% to 5%.”
Saying FDA proposals and actions to restrict or ban flavors may lead to a “slowdown” in e-cigarette growth in the next year or two, Willard stood by the predictions for Juul products.
“I think even taking into account the fact that there could be some impact in the short run ... I think we're confident in that long-term growth rate that we forecasted,” Willard said. “It may just be that they're slower growth early on and more rapid growth later on."
Related to Altria and Juul’s strategies to help restrict access to tobacco products, Willard said Juul remains the only e-vapor company to have stopped shipping flavored products other than tobacco, menthol and mint to retail; those shipments stopped Nov. 13, he said. Juul has taken additional steps to enhance its online age-verification processes for sales on its website to adult tobacco consumers 21 or older, as well as developing a restricted distribution system for retailers, he said.
Juul has also halted all promotional use of U.S. social media platforms and will continue to monitor and remove inappropriate material from third-party accounts. And Juul is developing new technologies to further restrict youth access.
Willard said Altria has engaged in what he called “unprecedented efforts” at the federal and state level to raise the minimum legal age to purchase all tobacco products to 21. “We believe it is the single most important step we can take today and will be stepping up our efforts in the coming months,” he said. “Already this year, we are supporting legislation raising the legal age in both Washington state and Virginia, and we continue to engage nationwide in this effort.”
Commenting on its agreement to market the iQOS heat-not-burn device from New York-based Philip Morris International, Willard said the FDA approval process to move ahead in the United States is now going on two years.
Altria remains committed to the success of iQOS and has been laying the groundwork for eventual introduction, Willard said, including establishing brick-and-mortar stores in multiple cities, hiring personnel to support prelaunch activities and collaborating with business partners to best position iQOS at retail.
Concerning Cronos, and Altria’s $1.8 billion investment for a 45% minority stake in the cannabis producer, Willard said he expected the transaction to close in the first half of 2019.
The investment creates a new growth opportunity in an “adjacent category poised for rapid growth. It complements our strong core tobacco businesses and expands our income opportunity beyond the U.S.,” he said.
Citing third-party reports, Willard said the 10-year global cannabis revenue opportunity is about $40 billion under current legal environments and more than $250 billion in a fully legal market worldwide.
“Our investment will allow Cronos to more quickly expand its global footprint and production capacity,” Willard said. “We also expect it to accelerate the execution of its strategic initiatives, including investments in cannabinoid innovation and developing differentiated products and brands across medicinal and recreational categories.”
Brand equity investments behind product expansions, packaging and a digital loyalty program allowed Altria’s Philip Morris USA subsidiary to “successfully stabilize” Marlboro, its flagship cigarette brand, Willard said. Following what Willard called a “soft” 2017, Marlboro's full-year 2018 cigarette retail share of 43.1% was unchanged compared to its fourth-quarter 2017 share.
“As we discussed in the third quarter, we believe keeping Marlboro strong and relevant is important to the long-term profit maximization in cigarettes,” Willard said. “This may mean that Marlboro retail share varies up and down quarter-to-quarter as we continue to balance momentum behind the brand and profitability.”
Discussing its loyalty program in Texas markets, Willard said 700,000 adult smokers who were 21 or older enrolled within the first 10 days of the program and entered nearly 1.5 million pack codes.
In the superpremium tobacco segment, Willard said its Nat Sherman subsidiary “continues to deliver against its plan, and we’re pleased with its performance following the regional expansion of its premium brands across the Western United States in 2018.”
In the fourth quarter, Nat Sherman had a 0.3% share in the cigarette category in states selling the product, he said.