Altria Could Gain From A Menthol Ban In The Post-Merger World

A recent merger between the U.S. number two and number three tobacco firms, Reynolds and Lorillard, is mostly based on capitalizing the opportunity in the menthol realm. However, as the FDA scrutinizes the product over higher addictive properties and harm to certain ethnic groups, it may just be a matter of time before menthol in cigarettes is banned, just like all other flavor additives. In this case, market leader Altria could wind up in a better position and here’s why:

1. Menthol cigarettes are an important category for tobacco makers in the U.S. since they are more appealing to newer smokers and to a fast growing African-American population. ^[1] In general, the rate of decline in menthol has been half that in regular cigarettes, which has resulted in higher prominence in total sales. Furthermore, contrary to regular cigarettes, market share for menthol cigarettes has increased across all ethnic groups. While Altria’s Marlboro takes the cake in regular cigarettes, it lags behind in menthol, with the category accounting for just 20% of total sales. ^[2] This figure could be substantially higher for Reynolds, whose counterpart Lorillard got close to 90% of its revenues from the sale of the leading menthol brand, Newport. ^[3] Furthermore, Reynolds’ own brand, Camel, holds the number three position in the menthol market. In this situation, while a possible ban could hurt Altria, the blow to the company may not be half as bad as that for Reynolds.

2. Since menthol has higher appeal among newer smokers, and is, according to some studies, more addictive, Reynolds may be better positioned to widen their customer base going forward. Research by Citi group indicates that while Reynolds’ Camel and Lorillard’s Newport have registered growth among the vital ASU30 (Adult Smokers Under 30), Altria’s Marlboro Menthol witnessed declines. Given this, Reynolds could actually build customer traffic as those in this category settle on a particular brand over time. However, in case of a ban, the opportunity cost may be even higher for Reynolds, not only in terms of the loss in existing customers, but also in terms of a loss in potential customers going forward in comparison to Altria, who has historically used non-menthol brands to build their customer base.

3. Given that Reynolds has better prospects of building their customer base, Altria could actually benefit, as a large proportion of these menthol users switch over to regular cigarettes post a ban. Since Altria holds Marlboro, the leader in regular cigarettes, many ex-menthol smokers could choose Marlboro, even if they previously smoked a menthol brand offered by Reynolds. In fact, if the ban is instituted at a later stage, when Reynolds has been successful in building a large enough customer base leveraging its menthol offerings, gains from customers switching to Marlboro could actually outweigh the loss from Marlboro Menthol smokers dropping out of the market, post the ban. This could, in fact, go on to increase sales for Altria making the menthol ban a blessing in disguise.

• What Does The Reynolds-Lorillard Deal Mean For Altria? 
• Will Menthol Cigarettes Become Uncool In the U.S.? 
• What Would A Ban On Menthol Cigarettes Mean For Altria? 
• Trefis analysis: Altria retail share in the number of cigarettes sold in the U.S. 
• Trefis analysis: Altria number of cigarettes sold in the U.S. 

1. Smoking Rates Among African Americans [↩]
2. Judgement Day for Menthol Cigarettes Is Getting Close [↩]
3. The Five Key Reasons Why the Reynolds/Lorillard Deal Is Taking Shape [↩]