Altria (NYSE:MO) reaffirmed its 2013 EPS guidance and its long term business strategy at the 2013 Consumer Analyst Group of New York (CAGNY) Conference. The Marlboro maker highlighted value creation capacity of the U.S. tobacco industry. Despite declining total tobacco volume, the estimated total profit pool of the industry is estimated to have grown at a CAGR of 4.5% since 2007 to $13.8 billion in 2012. Altria’s share of this growing profit pool increased from 44% to 52% during the same period, as the company added to its leading position in the cigarette market by acquiring market leaders in the machine-made cigars (John Middleton in 2007) and smokeless tobacco (UST Inc. in 2009) segments. 
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Clearly the company has captured the evolving preferences of tobacco consumers in the country by tapping the visible trend seen over the last few years of adults switching from cigarettes to smokeless alternatives or using multiple forms of tobacco products. However, a large part of the company’s success is supported by the massive strength of its key brands, namely: Marlboro, Black & Mild, Copenhagen and Skoal. Hence, focusing on the progress of these premium brands and increased investment in promotional activities forms a core strategy for Altria in creation of long term value for its shareholders.
Altria’s Brand Muscle And Its Exercise
The shear strength of Altria’s brands is apparent from the fact that it sells almost half of the cigarettes sold in the U.S. and the company’s iconic Marlboro brand holds more than 42% of the whole market. Its share in the smokeless category is over 55%, with Copenhagen and Skoal constituting half of the market and its Black & Mild holds 30% retail share of the machine-made cigars market in 2012. The company believes there are future growth opportunities in these brands, and is working on strategies to make these brands even stronger.
During 2012, Altria introduced a new brand strategy for Marlboro that focuses on four product families, Red, Gold, Green and Black. Under the new strategy, the company has been creating brand awareness in ways to enable it to expand its reach among adult smokers. It has modified the brand’s retail look and its website to highlight the four product families and communicate the new strategy effectively. Other promotional actions taken during 2012 include repositioning Marlboro Black and Marlboro NXT, a part of the Marlboro Black family in additional geographies. In the smokeless segment Altria expanded geographic reach of its new products like Copenhagen Souther Blend and Skoal ReadyCut. The impact of these actions were visible in the full year earnings report. (See Marlboro, Copenhagen Power Altria’s Fourth Quarter) Earlier this year, the company also expanded distribution of its Marlboro Southern Cut nationally.
Amidst industry-wide declining volume trend, we forecast Altria’s retail share in the cigarettes category to increase to around 51% over the forecast period due to its brand equity and the ability to adapt to evolving consumer preferences. In the smokeless products segment, we expect the company to gradually increase its market share to around 57%, primarily driven by new product launches.
Our $32 price estimate for Altria is around 5% below the current market price.
- Altria Group, Inc. at Consumer Analyst Group of New York Conference, Feb 19th, 2013, Altria Investors [↩]