Altria Acquires The Maker Of Nat Sherman Cigarettes And Cigars

Altria (NYSE:MO) announced on January 17th that it has acquired the privately-held Sherman Group Holdings and its subsidiaries (Nat Sherman). The latter sells super-premium cigarettes and premium cigars, and will join Philip Morris USA and John Middleton as part of Altria’s smokeable products segment. Nat Sherman will benefit from the retail distribution, brand management, and adult tobacco consumer engagement expertise provided by Altria. This news comes fresh on the heels of the Reynolds American and British American Tobacco merger. This is the latest move in a fast-consolidating tobacco market, where a small number of companies are fighting to gain market share amid a dwindling tobacco market, while at the same time attempting to develop alternatives to traditional cigarettes.

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The Appeal Of The All-Natural Category

Consumers seem to be looking for more natural products in all categories, from the food they eat to the beverages they drink. This trend seems to be spilling over into the tobacco category, as the demand for natural leaf tobacco grows across both cigarettes and cigars, and is a bright spot in an overall declining category. The natural leaf tobacco is free of additives, and offers a longer and better smoking experience, according to Matt Spillane, vice president of natural sales at Nat Sherman. He further added that these cigarettes are made with only tobacco and water, providing a more authentic taste, resulting in a greater puff count per stick. These incentives are prompting consumers to pay a premium price, which these cigarettes command. Moreover, in the cigarette category overall, the premium segment saw the smallest decline in the 52-week period ended November 22, 2014. This news is even better in the natural cigarette segment, which continues to grow, including the premium options. In 2014, the convenience store industry brought in more than $997 million in sales of natural cigarettes, and estimated sales of over $1 billion in 2015. Furthermore, in the period between October 1, 2014 and January 31, 2015, sales of natural cigarettes grew more than 19%, with 47 million units sold in convenience stores, according to Nielsen.

While the entire tobacco industry continues to face annual declines, the natural category has maintained its growth for more than ten consecutive years, as noted by Spillane. As taxes have lowered the gap between discount, premium, and super premium, the attractiveness of this segment has grown from the consumer’s standpoint. This same trend is true even in the cigar category, which grew at a rate of 0.6% for the 52-weeks ended November 22, 2014. But for the natural leaf cigars, the growth rate is much higher, at over 10% in the 24-weeks ended February 15, 2015 at c-stores. This big spike started in 2013 for the natural leaf cigars.

Nat Sherman also reached a milestone recently, having sold 1 million units during the 43-weeks ended October 29, 2016. Growth in the Nat Sherman brand was 45% year-to-date as of October 2016, and 93% for its Natural Kings brand, according to Spillane. This implies that over 700,000 Natural Kings packs were sold in the year-to-date in convenience stores, which is 340,000 more than the year prior.

Consolidation In The Tobacco Industry

While tobacco companies are expanding to newer markets, industry market share is consolidating, and the market is being increasingly controlled by a few international companies. In 2001, a little more than 43% of global market sales were controlled by the five leading companies – China National Tobacco Corporation, Philip Morris International, British American Tobacco, Japan Tobacco, and Imperial Tobacco. By 2015, this percentage had increased to 84%. The merger between BAT and Reynolds prompted speculation of a wave of consolidation in the tobacco industry. One possibility that may emerge in the aftermath of this is the re-merger of Philip Morris with Altria, eight years after the companies split up, as the acquisition of Reynolds by BAT would take away Philip Morris’ top ranking. Another possibility is a combination of Japan Tobacco with Imperial Brands. Japan Tobacco has in the past claimed it wants to be the number one tobacco company in the world. It has undertaken a number of acquisitions in the past, including the purchase of the international rights to Reynolds’ Natural American Spirit division, another natural cigarette company, in order to cope with a stagnating home market. While most speculation revolved around publicly traded companies, some analysts such as Jeffries’ Bennett said that China’s state monopoly may also enter the fray.

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