Altria Enters The E-Cigarettes Market Seizing On Its Growth Potential

During the Investor Day presentation on June 11, Altria Group (NYSE:MO) announced its entry into the e-cigarettes category with the introduction of its MarkTen brand. The e-cigarette brand will be launched into a lead market in Indiana in August this year through one of Altria’s subsidiaries, NuMark. The company first announced its plans to enter the category in April this year along with its first quarter earning results. As suggested in an earlier article, we think this is a positive move by the company and reflects the management’s focus on sustainable long term value creation for its shareholders, amid a rapidly declining market for cigarettes. ^[1]

About The E-cigarettes Category

An electronic cigarette is essentially an electronic inhaler which has three main components. 1. a cartridge, that contains the nicotine solution and also forms the mouthpiece; 2. an atomizer that converts the liquid into vapor when activated; and 3. a battery that powers the atomizer. They are similar to traditional cigarettes in form but work very differently.

In traditional cigarettes nicotine is a substance that raises the level of nervous activity in the body, which is the main factor responsible for the addictive properties of tobacco smoking. Nicotine is not regarded as a carcinogen, it’s primarily because of tar, smoke particles and other chemicals present in the smoke of traditional cigarettes that cause health problems to smokers.

E-cigarettes still contain nicotine, but they are considered substantially less harmful since the vapor produced has not been proven to contain any carcinogens in harmful concentrations. E-cigarettes are currently not subject to the kind of regulations and restrictions imposed on traditional cigarettes, and are therefore, being seen as potential long term replacement for traditional cigarettes. However, there are multiple studies going on to determine the exact health impact of nicotine vapor and the FDA has already stated its intentions to regulate e-cigarettes.

Although there is a very small market for e-cigarettes as of now – in terms of both volumes and revenue – it has been growing at a very fast pace. At $500 million in 2012, the market for these vapor devices is expected to double to $1 billion in 2013. Growth is primarily being driven by increased awareness and trial, as well as expanding retail distribution. With the entry of Altria, this category has become the newest playground for Big Tobacco. Reynolds American (NYSE:RAI) announced plans to revamp its Vuse brand of e-cigarettes last week, while Lorillard (NYSE:LO) entered the market by acquiring Blu ECigs in 2012.

Altria is a bit late to jump into the category and has some catching up to do with its competitors. However, it should be noted that unlike traditional cigarettes which have been around for years and have consumers that are characterized by huge brand loyalty, e-cigarettes is a relatively new category and the company is not expected to face a lot of problems in attracting consumers towards its new product for a trial.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Altria Group, Inc. 2013 Investor Day, investor.altria.com [↩]