Has Altria Entered The Electronic Cigarette Market Just In Time?

AHII: American Heritage International logo
AHII
American Heritage International

Submitted by Elaine Carrington as part of our contributors program.

Has Altria Entered The Electronic Cigarette Market Just In Time?

The unquestionable rise in awareness concerning the negative health impact of smoking has led many analysts to forecast the downfall of the tobacco industry. What investors once considered one of the safest and most defensive industries has over the past decade lost is “foolproof” allure. However, over the past five years an alternative smoking product has exploded in popularity, a product that now looks set to be the rescue the tobacco industry. That product is an electronic cigarette.

Relevant Articles
  1. Will Johnson & Johnson Stock Rebound To Its Pre-Inflation Shock Highs of $185?
  2. Should You Pick Eli Lilly Stock After A 4x Rise In Three Years?
  3. Down 9% This Year, What’s Next For Lululemon’s Stock Past Q4 Results?
  4. Down 14% In The Last Trading Session, Where Is Adobe Stock Headed?
  5. Will Higher Federal Government Spending, Gen AI Drive Digital Security Stocks Like CrowdStrike Higher?
  6. Up 30% In A Year Is FedEx Stock A Better Pick Over UPS?

Electronic cigarettes are a tobacco-less battery powered version of a traditional cigarette that uses an atomizer to vaporize liquid nicotine. The vaporized nicotine creates a cloud of vapor, similar to that of the cloud of smoke a traditional cigarette creates, meaning the devices mimic the process of smoking.

Initially designed as an aid to stopping smoking, consumers now use the products as an alternative smoking product. One that they have no intention of ‘giving up’, but prefer as to use in place of a traditional cigarette.

In August last year, analyst Bonnie Herzog of Wells Fargo Securities indicated that sales of electronic cigarettes during the first half of 2013 had already reached $700M from traditional retail outlets like convenience stores. Including online sales of $500M to $625M in the equation gave an estimated January-July sales figure far in excess of $1B. The company now believes the electronic cigarette market will be worth $10B by 2017.

Many analysts’ opinion is that this rapid growth serves to strengthen the argument that predicts the decline of big tobacco, but in reality, a number of the major US tobacco companies have already started taking advantage of the fledgling industry. An example being Altria Group Inc. (MO).

On February 19, 2014, Altria announced its plans to launch its MarkTen e-cigarette nationally starting in the second quarter. The company had previously started selling its electronic cigarette in Indiana and Arizona, and while no sales figures are currently available, the national rollout suggests the test marketing in these two states had been successful. Hinting at a potential measurement of this success is a statement made by Altria Chairman Marty Barrington claiming the MarkTen had achieved a market share of 48% in only seven weeks of sales in Arizona.

The announcement followed another electronic cigarette related move by Altria, which saw the tobacco giant bolster its presence in the e-cigarette market by acquiring e-cigarette maker and distributor Green Smoke Inc. The acquisition reportedly cost Altria $110M and will close during the second quarter, coinciding with the national rollout of MarkTen.

Looking globally, Altria formed a strategic partnership with Philip Morris International, Inc. (PM) in December 2013. Under the strategic partnership, Philip Morris has exclusive rights to sell Altria’s e-cigarettes outside the U.S. and Altria gains exclusive rights in the U.S. to alternative heated tobacco products developed by Philip Morris. Both companies already had close links, having spun off from one another in 2008 in a bid to reduce regulatory risk exposure. The spin off saw Philip Morris sell Marlboro branded cigarettes globally and Altria sell the brand in the US.

The company’s decisive move into the electronic cigarette space suggests two things: that it realizes the potential for growth and wants to establish itself before any of its major rivals. In another statement, Barrington said, “It really is early days in e-vapor. Consumers are still choosing. They are trying to find their product. They are trying to find their brand,” adding that Altria’s goal is to be a leader in the e-cigarette category no matter how much it grows.

These comments suggest Altria believes the electronic cigarette market will mimic that of its traditional counterpart, in that brand loyalty will be strong. They also suggest that, in response to these beliefs, Altria is launching a range of electronic cigarette brands in the hope that one or more will take hold of the market and become as popular as its current traditional offerings.

This situation, of course, also presents Altria with considerable risk. The company owns and markets what is probably the most well-known cigarette brand in world, and it will have to work hard before it can boast a similar position in the electronic cigarette space. For a number of years before taking action, big tobacco did not see the electronic cigarette market as a threat. This presented smaller companies with a window of opportunity, a two year period during which these companies could establish their products and get a head start on big tobacco with their brand building.

Consider American Heritage International (AHII), for example. American Heritage started developing its own brand of electronic cigarette during 2012, and initiated a rollout and marketing strategy early 2013. The company now has four separate electronic cigarette products, all of which bear the American Heritage brand, in 11 states across the US. It also has distribution agreements with a number of tier retail outlets including Chevron and 7-Eleven, and a large, growing online presence.

The currently non-restrictive marketing rules surrounding the electronic cigarette market mirrors those of the “golden age” of tobacco marketing in the 1950s. Companies such as American Heritage, while admittedly limited by budget, are on something of a level playing field when it comes to building a brand and driving customer loyalty. During the so-called golden age, marketing creativity proved key to acquiring many customers that still consume the products they first saw advertised half a decade ago. The apparent health benefits of the electronic cigarette put it at a distinct advantage over its traditional counterpart, but no more so than adding a filter to a cigarette did in the late 1950s. As a result, it is entirely possible that a creative, directed marketing strategy could see the American Heritage brand take a large portion of the market over the next ten years.

All said, the electronic cigarette industry will likely prove disruptive to the long-standing business models of big tobacco, but this does not mean the current incumbents stand to lose market share of the smoking industry as a whole. Having said this, big tobacco has so far been relatively slow to market, and this may yet prove to have been a window of opportunity for the first movers such as American Heritage.