Focus on Low-Risk Offerings Drives Altria (MO), Pricing Aids

Consumers’ rising health consciousness and stringent regulatory headwinds pertaining to cigarette sales are propelling tobacco companies like Altria Group, Inc. MO to focus on widening low-risk offerings. The company’s oral tobacco offering — on! — has been doing well. It has been focusing on expanding reduced-risk products (“RRPs”) such as IQOS. Efficient pricing strategies for tobacco products have been supporting the company’s revenues. Let’s delve deeper.

Rising Popularity for Low-Risk Products

RRPs, considered to be the next-generation tobacco products, have been gaining popularity owing to their less detrimental impacts on health. The marketing and technology sharing agreement between Altria and Philip Morris International Inc. PM, pertaining to the sale of IQOS, is noteworthy. IQOS — a heat-not-burn device — is among the leading RRPs in the industry. The FDA approved the marketing of IQOS and HeatSticks as Modified Risk Tobacco Products in July 2020. Altria, through its subsidiary Philip Morris USA, Inc., is striving to make IQOS and its variants as well as Marlboro HeatSticks available across more stores in the United States. Other tobacco companies such as Turning Point Brands TPB and British American Tobacco BTI have also been boosting presence in the low-risk tobacco space.

Altria is also undertaking efforts to expand oral tobacco offerings. The company, through its subsidiary Helix Innovations, has full global ownership of on! — a popular tobacco-derived nicotine (TDN) pouch product. 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. During the second quarter of 2021, Helix achieved unrestricted manufacturing capacity for on! in the U.S. market. As of Jun 30, 2021, Helix expanded its distribution of on! to 105,000 stores.  The company is also undertaking efforts to expand in the cannabis industry. It acquired stakes in the Canada-based cannabis company, Cronos Group.

Pricing Power

Strong pricing for tobacco products has been supporting Altria’s performance. Though higher pricing might lead to possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases due to the addictive quality of cigarettes. During second-quarter 2021, higher pricing across the Smokeable and Oral Tobacco categories supported the top line. Moreover, higher pricing drove growth in adjusted operating companies income (OCI) across all the segments.

Wrapping Up

Headwinds in the cigarette category have been a challenge for Altria. The unit is being affected by strict marketing and sales regulatory norms, anti-tobacco campaigns as well as increased consumer awareness regarding the harmful impacts of tobacco consumption. The company continues to assess factors like stay-at-home practices, purchasing patterns and the roll out of the coronavirus vaccine on adult tobacco consumers. Amid such a scenario, Altria’s efforts to boost low-risk offerings look prudent. This along with consistent gains from pricing power is likely to keep the company well placed for growth.

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