Altria Focuses on Pricing & RRPs Amid Soft Cigarette Volumes

Altria Group, Inc. MO has been focused on expanding in the oral tobacco space in the face of receding cigarette volumes due to rising health consciousness and government regulations. Also, the company has been benefiting from its robust pricing initiatives. These factors keep Altria well placed for growth.

Moreover, the tobacco giant saw some spike in demand for smokeable as well as oral tobacco products in the first quarter of 2020, thanks to consumers’ stockpiling trends amid the coronavirus crisis. The company said that it has not witnessed any material impact of the coronavirus outbreak on its supply chain or distribution systems. Most of the retail stores where the company’s products are sold (like convenience stores) have been considered as essential businesses and remain open.

Solid Pricing & Strength in Oral Tobacco Products

Altria’s strong pricing has helped it stay afloat in the industry even in the face of declining cigarette volumes. Though higher pricing might lead to a possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes. In first-quarter 2020, higher pricing boosted adjusted operating companies income (OCI) growth in both smokeable and oral tobacco product segments. Continuation of such trends is likely to aid Altria’s OCI and bottom line.

Altria has been responding to the changing market scenario by offering several oral tobacco products. During the first quarter of 2020, revenues in the unit improved 11.3% from the year-ago quarter to $601 million, driven by higher pricing and shipment volumes. Continuation of such trends is likely to fuel Altria in the forthcoming periods. It has been making considerable progress in the noncombustible business platform. In this respect, the marketing and technology sharing agreement between Altria and Philip Morris PM, pertaining to the sale of IQOS in the United States, was approved by the FDA in 2019. IQOS, which has been faring well internationally, is aiding Altria’s performance in the United States as well.

Further, Altria (through its subsidiary Helix Innovations) acquired an 80% stake in certain companies of Burger Group, which is engaged in the commercialization of the oral tobacco-derived nicotine (TDN) pouch product — on! Management believes that on! is a worthwhile addition to Altria’s smokeless portfolio, as oral TDN products are gaining popularity in the United States owing to their low-risk claims. Notably, on! was sold in more than 28,000 stores by the end of the first quarter of 2020. Apart from this, Altria is undertaking efforts to expand in the cannabis industry.

Soft Cigarette Volumes a Concern

The company has long been struggling with weak shipment volumes in the smokeables unit. During the first quarter of 2020, the company’s total cigarette retail share declined 0.7 percentage point to 49.2%. In fact, on adjusting for trade inventory movements, calendar differences, preliminary estimates of stock hoarding amid coronavirus and other factors, Altria’s smokeable products’ domestic cigarette shipment volumes fell approximately 5% and total domestic cigarette industry volumes declined an estimated 3.5%.

Cigarette shipment volumes are being adversely impacted by anti-tobacco campaigns and increased consumer awareness regarding the harmful impacts of tobacco consumption. Regulatory hurdles are also a vital factor limiting the marketing of cigarettes. Government bodies across different nations are imposing restrictions on tobacco companies. Incidentally, the U.S. Food and Drug Administration (FDA) has made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking.

Also, Altria and other cigarette manufacturers have been directed by the court to put up self-critical advertisements on television and newspapers to dissuade customers from smoking. On Mar 17, the FDA issued a final rule, which requires graphic health warnings on cigarettes as well as advertisements. However, Altria believes that the rule goes beyond what is allowed under the First Amendment and notified that it was then assessing options for further moves.

The Bottom Line

While cigarette volume softness is a concern for Altria, we expect robust pricing initiatives and strength in oral tobacco products to help it counter the challenges. Shares of the Zacks Rank #3 (Hold) company have gained 10.2% in the past three months compared with the industry’s growth of 14.8%.

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