Altria: Winds of Change

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Presumably, everyone is aware of the “Bear Case” for Altria by now. We have written about it so many times over the past three years: until Altria has a proven/working strategy to break out of the ailing US cigarette business, its share price (MO) is set to be in an eternal decline trend – even if “rotation to value” trade and “news not that bad” misperception could occasionally help Altria to venture relief rallies.

There is no change in our position. However, we need to recognize the “winds of change” at Altria. In our “Altria: Q2 2023 Results” write-up (August 2023), we concluded that:

“Altria’s new-found RRP/NGP focus is undeniable. Altria is trying to push its boundaries to break out of the ailing US cigarette business (i.e. transformation to RRP/NGPs and/or expansion to new categories/geographies). We like Altria going above and beyond what is expected: testing a new RRP/NGP product online in Sweden (3D-challenge: new product, new geography, new channel). Is it too little too late? Time will tell.”

In this write-up, we will build on where we left off by incorporating the most recent disclosures of Altria from the 2024 CAGNY Conference. Firstly, we start with a side note on the smokeable segment (the dying core of the Altria business). Altria underlines that, over the past five years, operating income from the smokeable segment grew by $2.3Bn (CAGR: 4.9%) while the Marlboro stability is maintained (i.e. average annual SoM decline of about a quarter of a share point). However, we need to note that Altria sold 94.8Bn Marlboro sticks in 2018 and only 68.6Bn in 2023: i.e. -27.6% decline in 5 years (CAGR: -6.3%). In order to compensate for the volume decline, Altria upped the Marlboro net price from $6.79 in 2018 and $8.75 in 2023: i.e. +28.9% increase in 5 years (CAGR: +5.2%).

Marlboro is the ultimate cigarette brand. However, when the volume is melting like an ice cube under the sun (especially, in the increasing presence of non-cigarette alternatives), there may not be enough price hikes on Earth to compensate for the volume decline; a breaking point obviously exists. Marlboro or not, we are eventually talking about a mass-produced consumer product (- not a ultra-luxury product for a select few). The way we read the situation is that Marlboro still has enough gas power to finance Altria’s transformation provided that Altria makes smart investment decisions and achieves a quantum leap in the next 5 years.

Leaving aside the accompanying commercial, organizational/cultural and digital transformation, we can analyze Altria’s business transformation in three vectors: smoke-free nicotine products, non-nicotine products and international expansion.

Smoke-free nicotine products:

Altria is working on a multi-category approach with immediate focus to uplift NJOY’s segment share and improve on!’s profitability. Since acquiring NJOY in 2023, Altria completed the groundwork for sustained long-term growth: strengthened the upstream supply chain and trade inventories, more than doubled the retail footprint to 75,000+ stores (with a further plan to expand to 100k stores in 2024), improved the retail visibility (from the bottom of the shelf to a premium fixture position), launched a retail trade program and tested different commercial campaigns (e.g. trial generations, bundle offers). However, Altria’s actions are yet to bear fruit: as of Dec 2023, NJOY still has only 4% national share in (declining) tracked channels. Altria obviously has commercial footprint and capabilities to make the most out of NJOY. However, their return on NJOY investment depends on two unknowns: (1) the speed with which the illicit e-vapor market to be cleaned up, (2) the number of pod-based (or disposable) products the US FDA will eventually authorize. On the regulatory front, PMTAs for NJOY’s menthol products remain pending with the FDA. Meanwhile, Altria is finalizing PMTAs for blueberry and watermelon flavored NJOY products with age-gated Bluetooth technology (- which are claimed to be more effective at promoting adult switching while preventing the underage access in virtually all cases). E-vapor is a very dynamic category in terms of product development: Altria’s R&D feels the pressure to develop and get authorized (from the US FDA) the next generation NJOYs in order to keep the acquired portfolio current / competitive.

With on!, Altria managed to reach a meaningful level of brand awareness and segment share – although their figures are overshadowed by the explosive growth of ZYN. With an inferior portfolio, we believe there is nothing more Altria could do at this stage. Altria claims that about three out of four dippers and nicotine pouch consumers prefer on! PLUS over ZYN on a blind basis. Thereby, we expect Altria to reignite its commercial efforts once on! PLUS is authorized by the US FDA. BAT exploited the JUUL-fatigue to take the distant lead in the (legal) e-vapor category with VUSE. Can Altria venture a similar move with on! (against ZYN). For the time being, we say: possible, but not very likely (- PMI is obviously not JUUL). Nevertheless, it is fair to conclude that Altria has successfully built a meaningful base in the nicotine pouch segment that can serve as a platform for growth in the coming years.

In heated tobacco, Altria has two development routes: Ploom (JV with Japan Tobacco) and SWIC (internal development). To read more: Heated Tobacco Products. Ploom can give a meaningful base (similar to on!) to Altria; but, it is not an IQOS killer (with or without Marlboro brand pairing). SWIC is a concept that excites us (for reasons which we will not disclose here); Altria could be onto something there. However, there is a long and treacherous path from concept / proposition development to commercial success. We are waiting impatiently for the day that we can get a hold of SWIC and test it ourselves.

Non-nicotine products:

Through large-scale consumer research, Altria identified “elevate the everyday” through moments of enhanced energy, focus, stress relief and relaxation as the focus area for Beyond Nicotine ($100Bn total addressable market in the US). Altria’s non-nicotine growth strategy is focused on testing and learning in the US market. In 2024, Altria plans to expand its small retail tests to 10 organically & partner-developed products and, by 2028, Altria aims to broadly distribute at least five products (some of which may not contain age-restricted ingredients). Without further details, we can only say that “Altria is eager to jump on the Beyond Nicotine bandwagon”.

International expansion (through smoke-free products):

Altria aims to generate incremental income by commercializing its smoke-free portfolio in countries with proven market potential – starting with on! ($1Bn-$2Bn total addressable international market) and developing a pathway to participate in heated tobacco and e-vapor markets ($35Bn-$50Bn total addressable international market). In 2024, Altria is planning a broader expansion of on! PLUS in Sweden (beyond e-commerce) and a targeted launch in the United Kingdom. Accordingly, Altria is evaluating the strongest go-to-market pathways: organically and with partners.

Honestly speaking, we don’t see how Altria can compete with the established international players (PMI, BAT and even Imperial Brands) without having its own commercial presence / infrastructure and an absolutely superior product portfolio. We are also not sure what they can offer to JT (worth the focus and investment) at this stage. If Altria is serious about international expansion and becoming a global player, there are two smart & affordable acquisitions we believe they should consider: i.e. threatening PMI on its own turf in the same manner PMI threatens Altria in the US through Swedish Match acquisition. We will not disclose the potential acquisition targets in order to avoid any speculation.

Lowering the expectations: In terms of international expansion and non-nicotine products, Altria made a silent adjustment in its 2028 Enterprise Goals by removing the term “revenue”. Moreover, in the explanation of 2028 Goals, the language is modified from “multi-billion dollar opportunities” to “compete in & enter”. We believe as Altria doesn’t yet have a proven portfolio or strategy, any reference or commitment to revenue is being avoided to manage (down) the expectations. It is understandable that Altria needs more time to test, assess & plan before making commitments (recall: PMI’s failing Wellness & Healthcare targets). However, until Altria sets concrete revenue targets in these areas, market will (rightly) perceive the work as “exploratory” and associate only negative value to it (i.e. cost of “exploration”).

The final thought:

We feel like Altria’s future plans were heavily dependent on the PMI Merger, PMI (RRP/NGP) Strategic Cooperation Agreement and JUUL acquisition. When all three initiatives failed (badly), Altria turned into something of a fish out of water and was forced to move out of its comfort zone. There was no longer an easy way out. After a period of confusion, Altria is now putting together a portfolio of products and strategic initiatives to break out of its mold: to survive & thrive. They are trying to take their destiny into their own hands.

Is it too little too late? Maybe. But, there is some hope now. There is something to follow in excitement about Altria now. After all, Altria is the second most valuable tobacco company in the world and we are excited to see that they are not going to go down without putting up a fight.

A scrappy Altria! We like the idea… but, the execution is what matters the most.

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