Altria shuts down e-cigarette brands as she watches Juul and waits for iQOS decision

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Tobacco giant Altria is ditching its existing e-cigarette brands as it considers the best-selling brand, Juul.

Altria announced on Friday that it would cease its MarkTen and Green Smoke products, as well as the oral nicotine Verve products. It said it was based on the financial performance of the products and the regulatory process that would require Altria to file any updates with the Food and Drug Administration before placing them on the market. The company expects to write down the assets with a one-time pre-tax charge of approximately $ 200 million in the fourth quarter.

Instead, Altria said it would “refocus its resources on more attractive reduced risk tobacco product opportunities,” referring to tobacco products that are considered less harmful than the consumption of conventional cigarettes. Already, the company has signed an agreement with Philip Morris International to market its heated tobacco product, iQOS, in the United States if the FDA allows it. Now Altria is considering taking a significant minority stake in e-cigarette company Juul, people familiar with the matter told CNBC. That, along with a deal announced Friday to buy a stake in Canadian cannabinoid company Cronos, are signs of the tough choices Altria must make to compete.

“We remain committed to being the leader in providing adult smokers with innovative alternative products that reduce risk, including e-vapor,” Altria CEO Howard Willard said in a statement. “We don’t see a path to leadership with these particular products and believe the time has come to refocus our resources.”

Altria manufactures the best-selling cigarette, the Marlboro. In total, its cigarette brands account for half of the market, according to IRI data included in the company’s third-quarter earnings release.

His electronic cigarettes have not performed as well.

In the four-week period ended Nov. 17, Altria captured just 4% of the e-cigarette market, according to Nielsen data compiled by Wells Fargo analyst Bonnie Herzog. During the same period, Juul captured 75 percent of the market.

Juul’s sales have climbed 941% in the past year, according to Nielsen. The company’s success generated nearly 64% of the category’s $ 2.84 billion total sales in the past year.

For Altria, an investment in Juul would give it something it struggles with: volume growth.

Since 2009, Altria’s revenue has increased 9%, from $ 23.56 billion to $ 25.58 billion. But Altria’s cigarette volume in the United States almost halved – to 116.6 billion units in 2017, from 211.9 billion units in 2000.

And Altria currently earns most of her money selling cigarettes. Of the $ 25.58 billion in total revenue the company generated last year, $ 22.64 billion, or 89%, came from its smoking products business segment, which contains cigarettes and drugs. cigars.

On average, Altria’s cigarette volume declines by 3% each year, according to a review of the company’s financial statements. The company succeeded in compensating for these decreases with price increases. However, the declines have started to accelerate, worrying some analysts and investors as they could be unsustainable.

Altria shares are down about 24% this year.

In the first nine months of this year, the volume of Altria’s cigarette shipments fell 6.3%. In a call with Wall Street analysts in October, Altria CEO Howard Willard attributed at least part of the trend to more smokers ditching conventional cigarettes and switching to e-cigarettes.

Right now, when smokers give up Marlboro for Juul, Altria loses. That will change if Altria owns any part of Juul.

Additionally, Juul pods may be more cost effective than conventional cigarettes, as they are generally untaxed and do not have to pay the costs associated with the Master Settlement Agreement (MSA), an agreement negotiated in 1998 between tobacco manufacturers. and state attorneys general that ended. a wave of lawsuits underway.

An average pack of cigarettes in the United States costs consumers $ 6.60, according to a research note by Piper Jaffray analyst Michael Lavery. State and local excise taxes on this package are typically $ 1.75, he wrote, while costs associated with the MSA total 75 cents. Manufacturers’ operating profit is typically $ 1.26, Lavery said.

Juul does not pay the roughly $ 2.50 in MSA fees and taxes that Altria pays. So far, 10 states have enacted taxes on e-cigarettes, according to the Tobacco Free Kids Campaign.

A four-pack of Juul nicotine pods costs $ 15.99, or about $ 4 per pod, on the company’s online store. The amount of nicotine in each pod is equivalent to one pack of cigarettes. So while it is not known how much money Juul makes on each pod since the company is private, Juul appears to have an advantage.

Pressure has mounted on Juul, with regulators demanding that the company correct “epidemic” levels of minors using the company’s products. However, Altria is used to navigating regulation and litigation. And he may decide that the risks are worth taking.

Altria also announced on Friday that it would invest $ 1.8 billion to buy a 45% stake in Cronos. As an investor, Altria said it would bring expertise in regulatory affairs, regulatory science, compliance, government affairs and brand management to Cronos.

If Altria also invests in Juul, it is likely that the company can provide the same services.

Altria is also awaiting a decision from the FDA on Philip Morris International’s new heated tobacco product, iQOS. The device heats tobacco instead of burning it, with the idea that it gives smokers the nicotine they want while preventing combustion, the chemical process responsible for the production of toxins in cigarettes. PMI is already selling iQOS in 46 markets abroad.

PMI has two separate requests with the FDA: one that would simply allow it to sell iQOS in the United States, and one that would allow it to market the product as being less harmful than smoking conventional cigarettes. The company said it expects a decision by the end of the year. If the FDA clears the product, Altria will sell it in the United States

Altria declined CNBC’s request for comment.

– CNBC Lauren Hirsch contributed to this report

LOOK: How Juul made vaping cool and became a $ 15 billion e-cigarette giant


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