Big Tobacco Botches the E-Cig Name Game

Submitted by Sizemore Investment Letter as part of our contributors program

Back in April, I asked if E-Cigarettes would relight Big Tobacco’s prospects.   I had my doubts.

E-cigs seemed to be a more pleasurable version of a nicotine patch: something that an existing smoker might switch to for health reasons but not exactly an attractive or glamorous product for someone who doesn’t already smoke.  (Humphrey Bogart would not have been as cool in Casablanca with an e-cig dangling between his lips.  This is an indisputable fact, not an opinion.)

It certainly made sense for Altria ($MO), Reynolds American ($RAI) and the rest of Big Tobacco to get in on the action; it’s better to extract a little more revenue from defecting cigarette smokers than to lose them altogether.

But investors should be realistic about the potential for e-cigs to make Big Tobacco a growth industry again.  It’s not going to happen.  Though there are hundreds of millions of tobacco users worldwide (the World Health Organization puts the number of tobacco users at over 1 billion), public health campaigns, legal restrictions, and changing consumer tastes have put cigarette smoking in terminal decline in the developed world.  As a sobering (no pun intended) case in point, American teenagers are more likely to use illegal drugs than to light up a cigarette.

Perhaps most damaging, new “plain packaging” rules are directly assaulting the single most valuable assets of Big Tobacco companies: their brands.

In Australia, all cigarette boxes look identical, regardless of brand: plain white boxes with the brand name written in a uniform font, size, and placement.  Oh, and the same graphic photos of people dying of lung cancer on the back.

Similar rules are being considered in Canada, India, the UK and the European Union.  Big Tobacco is fighting it tooth and nail on trademark and intellectual property grounds, and I consider their objections valid.  But the assault on branding seems to be the next front in the ongoing war of attrition between public health advocates and Big Tobacco, and if history is any guide, the public health advocates will win.

This brings me back to e-cigarettes.  Altria is jumping into the e-cig market with a new product under the brand name Mark Ten.  Nowhere on the packaging will there be any prominent mention of Altria or its best-known brand, Marlboro.

I’m left scratching my head here.  There are over 250 e-cigarette brands currently on the market.  While I don’t see a smoker paying a large premium for a Marlboro-branded e-cig, I would certainly expect them to gravitate to a brand they already know.  In failing to use the Marlboro name, Altria seems to be neutralizing its single biggest strength: a consumer brand that is behind only Coca-Cola ($KO) and Anheuser-Busch InBev’s ($BUD) Budweiser in name recognition.

This would be tantamount to calling Diet Coke “Healthy Pop” and leaving all mention of the Coke brand off the can.  It’s madness.

If Big Tobacco is wanting to start fresh with new branding because of the toxic association between the existing brands and those filthy, old traditional cigarettes, they are wide off the mark.  Their market is existing smokers, not nonsmokers.  Unless they brand e-cigs as “portable flavored hookahs” or something with novelty appeal, it’s hard to imagine this product appealing to a young, unbiased consumer.

And this actually brings me to a related topic.  I noted last month that marijuana stocks were a terrible investment.  The companies engaged in legal production and marketing are small, poorly capitalized, and not likely to still be in business five years from now.

But as the legal regime surrounding their product continues to be relaxed, there may be room for a large, well-capitalized company to sweep in and take over the market.  Big Tobacco’s massive production and distribution machine could be easily tweaked to sell packaged marijuana cigarettes—which could be branded under familiar brand names such as Marlboro or Camel.

A lot of Americans would be put off by this, of course.  Fully 49% of Americans are against marijuana legalization for very valid reasons.  But the question Big Tobacco needs to ask is this: can their reputation get any worse than it already is?

Big Tobacco is already a pariah industry under constant attack.  What would they have to lose by marketing marijuana cigarettes in Colorado and Washington?  It’s hard to see a loyal cigarette smoker kicking the habit because “their” brand has now been tarnished by tie-dye wearing hippies.

At any rate, if Big Tobacco is going to continue to be a good investment for its shareholders, management needs to focus on leveraging their core brands.  The alternative is to slowly fade away.