Altria's Strategy: Growth Beyond Traditional Cigarettes

Diversification into Non-Combustible Products

Altria is focusing on transitioning consumers to FDA-authorized non-combustible products, leveraging internal innovation and potential M&A to navigate the competitive landscape. The broader industry context supports this shift, with regulatory measures and market availability playing crucial roles in promoting non-combustible alternatives.

"Product regulation should include measures that encourage and accelerate switching to non-combustible products, for example, by allowing adult consumers who would not otherwise quit smoking cigarettes to receive truthful and non-misleading information about such alternatives to enable them to make informed decisions and by applying uniform product standards to enable manufacturers to demonstrate the reduction in harmful and potentially harmful constituents, as well as the absence of combustion." --- (PM, sec filing, 2024/Q1)

"Your first shareholder question comes from Ann Gerken. With major players leaning into the U.S. Market in the non-combustible segment, how does the company view its internal product innovation capabilities versus opportunities and or need for potential M and A to successfully navigate an increasingly competitive landscape for both oral and heat pump burn products." --- (MO, event transcript, 2024/05/16)

"This progress of smoke-free product is reflected in a rapidly growing consumer base, with around 36.5 million estimated adult users as of June 30, and our products now available across 90 markets worldwide. Our combustible business also overdelivered, with a return to gross margin expansion ahead of plan in Q2 after two years of significant inflationary headwinds." --- (PM, earning call, 2024/Q2)

"But those that can't or won't, our goal is to transition them to FDA authorized non combustible products." --- (MO, event transcript, 2024/05/16)

"We've been very clear from the very beginning that we'll offer these markets to all adult smokers wherever it is legally possible because we have to be mindful that there's still there are quite a few markets which allow sales of a combustible cigarette, but this allow the sales of the better alternatives, which obviously puts the very big question mark with regards to the tobacco harm reduction application of a tobacco harm reduction strategy." --- (PM, event transcript, 2024/05/08)

Investments in Alternative Nicotine Products

Altria is leveraging advanced analytics and integrating complementary products to bolster its investments in alternative nicotine products, particularly in the nicotine pouch segment. However, challenges such as controlling new products and potential impacts from illicit alternatives remain significant considerations.

"The Swedish Match product portfolio is complementary to our existing portfolio, permitting us to bring together a leading oral nicotine product with the leading heat-not-burn product." --- (PM, sec filing, 2024/Q1)

"And secondly, could this mean a further stake sell is unlikely in the net? And then the second question given it is proving quite a challenge to control these new alternative nicotine products and as you suggested, prohibition isn't valid." --- (MO, earning call, 2024/Q2)

"(Photo: Business Wire) "PMI and its U.S. affiliates are accelerating their mission to move adults who smoke away from cigarettes in the U.S. by investing in new U.S. manufacturing capacity to meet the increasing demand for nicotine options that are scientifically substantiated as better alternatives," said PMI Americas President and U.S. CEO Stacey Kennedy." --- (PM, press release, 2024/07/16)

"Really what you see happening, Gaurav, you see that the data that we have, I mentioned the investments in advanced analytics, being able to bring that from both moist smokeless tobacco and the smokeable segment over to the nicotine pouch segment." --- (MO, earning call, 2024/Q1)

"While illicit oral nicotine products and nicotine analogues have not had a material impact on our business to date, a lack of effective enforcement could lead to an increase in the introduction and volume activity of these products, which could have a material impact on our innovative tobacco products businesses." --- (MO, sec filing, 2024/Q2)

Regulatory Challenges in Diversifying Products

Altria faces significant regulatory challenges in diversifying its product portfolio, including potential product removals due to FDA decisions, the need for effective regulatory environments that authorize smoke-free products, and the threat posed by unlawful e-vapor products. These hurdles complicate Altria's efforts to expand beyond traditional cigarettes.

"An unfavorable determination on an application, the withdrawal by the FDA of a prior marketing order or other changes in FDA regulatory requirements could result in the removal of products from the market." --- (MO, sec filing, 2024/Q2)

"As we venture into new product categories, we actively collaborate with different stakeholders and advocate for regulatory frameworks that can accelerate industry change and end smoking." --- (PM, earning call, 2024/Q1)

"And so we really need to see from an overall standpoint, a regulatory environment that is effective and is both looking at authorizing smoke free products that the consumer is demanding and enforcing against illicit e-vapor products. Bonnie Herzog: Okay, thank you. Billy Gifford: Thank you." --- (MO, earning call, 2024/Q1)

"The report called for a risk-proportionate regulatory environment for both e-cigarettes and heat-not-burn products and noted that e-cigarettes should remain the least taxed, cigarettes the most taxed, with heat-not-burn products falling between the two." --- (PM, sec filing, 2024/Q1)

"Unlawful and unregulated e-vapor products in the U.S. is a significant problem that threatens the harm reduction promise of federal tobacco regulation." --- (MO, Twitter, 2024/05/02)

Impact on Traditional Cigarette Sales

Altria's traditional cigarette sales have been significantly impacted by a 13% decrease in domestic shipment volume, driven by macroeconomic pressures, the rise of illicit e-vapor products, and retail share losses. Additionally, the cigarette industry's discount retail share increased due to economic pressures, further affecting Altria's sales.

"Shipment Volume Second Quarter Smokeable products segment reported domestic cigarette shipment volume decreased 13.0%, primarily driven by the industry's decline rate (impacted by macroeconomic pressures on ATC discretionary income and the growth of illicit e-vapor products), trade inventory movements and retail share losses." --- (MO, press release, 2024/07/31)

"The cigarette industry discount retail share was 29.3%, an increase of 1.0 share point versus the prior year and 0.2 share points sequentially, primarily due to increased macroeconomic pressures on ATC discretionary income." --- (MO, press release, 2024/07/31)

"And the first one, relates to industry wholesale shipments. So there appears to be a sizable inventory headwind in the first half such that we've got cigarette industry shipments down close to 12% versus the adjusted decline of around 9%." --- (MO, earning call, 2024/Q2)

"The cigarette industry discount retail share was 29.1%, an increase of 0.8 share points versus the prior year and 0.4 share points sequentially, primarily due to increased macroeconomic pressures on ATC discretionary income." --- (MO, press release, 2024/04/25)

"And then going to the decomposition range estimate for the impact of e-vapor on the cigarette category is 1.5 to 2.5." --- (MO, earning call, 2024/Q1)

Consumer Reception and Market Trends

Altria's consumers are under economic strain due to inflation and high interest rates, impacting their purchasing behavior. The company is adjusting resources to address these pressures. Despite these challenges, the discount segment is growing, indicating a shift in consumer preferences. Regulatory changes and market trends in Europe also influence consumer profiles and sales growth.

"So when you think about that, I think when you think about the pricing, and we've talked about the factors that go into pricing decisions, certainly we've highlighted for you that our consumer is under economic strain, both from the cumulative impact of inflation as well as debt loads and high interest rates." --- (MO, earning call, 2024/Q1)

"Or are the 2 categories attracting a different profile of consumers, particularly post the flavor ban in Europe?" --- (PM, earning call, 2024/Q2)

"And it's really mining that data and seeing the consumer economic pressure and being able to dial those resources appropriately for the situation that they're facing." --- (MO, earning call, 2024/Q1)

"It's still growing. Outside Italy, we have adjusted in-market sales growing close to double-digits." --- (PM, earning call, 2024/Q2)

"and continued pressures on tobacco consumer discretionary income. At retail, the discount segment grew 0.8 share points in the first quarter." --- (MO, earning call, 2024/Q1)