Cigarettes were once known as the epitome of cool.
Prominently displayed in Hollywood films and in slick
advertisements in glossy magazines.
But decades of evidence that smoking kills has
caused consumption to plummet. The industry sold 9
billion packs of cigarettes in the U.S.
in 2021, down from more than 21 billion packs in 2000.
The number of smokers has dwindled as well.
Almost 57% of American men smoked cigarettes in 1955.
Today, just 11.5% of U.S.
adults or about 28 million Americans are smokers.
That has caused an existential crisis for
tobacco companies.
Altria, the parent company of Philip Morris USA and the
nation's largest tobacco company with domestic market
share of about 50%, reported a 10% drop in
cigarette sales in 2022 from the year prior.
The maker of Marlboros says it wants to help smokers
transition away from cigarettes to what it calls
reduced harm alternatives like e-cigarettes,
heat-not-burn products, chewing tobacco and nicotine
pouches.
I have to say, there was a fairly stable decline rate
in the cigarette category until the last year or two.
And I really do believe that what is contributing to
a faster decline rate in the cigarette category is
these noncombustible alternatives that are
available.
There wasn't a lot of innovation in the sector for
decades, but now you're seeing consumers have more
choices and people use different products at
different points in the day. So, for example, if you
can't smoke a cigarette because you are at work or
on an airplane, you might use a nicotine pouch to get
your nicotine fix.
But Altria's Moving Beyond Smoking campaign has raised
eyebrows among its critics, who claim the company is
still firmly hooked on cigarettes. In 2022,
cigarettes and cigars made up 89% of the company's
sales.
I'm skeptical that the claims that the companies
want to move into e-cigarettes and heated
tobacco products are a sincere commitment to harm
reduction and improving public health.
I think the companies are moving into these products
to preserve their profitability and their
bottom line.
Altria and Philip Morris would like to expand the
marketplace. Cigarettes in our nation are slowly
declining no matter what Philip Morris can do.
So they're introducing new products, much as they did
with low tar cigarettes decades ago.
And while Altria has acknowledged that cigarettes
are dangerous, it has pushed back against attempts
by U.S. health officials to ban menthol flavored
cigarettes and limit nicotine levels that would
make them less addictive.
Cigarette smoking is a leading cause of preventable
death in the U.S., accounting for more than
480,000 deaths annually.
But are e-cigarettes and heat-not-burn products
really less harmful than traditional cigarettes?
And what impact will those devices have on
kids?
Philip Morris, a cigar importer, started the
company bearing his name in a tobacco shop in London in
1847. Morris developed his first cigarette in 1854 and
the business was incorporated in New York in
1902. Cigarette smoking was relatively rare at the time,
but improvements in production and the
introduction of blends changed that.
Per capita cigarette consumption increased from
54 cigarettes annually in 1900 to more than 4300
cigarettes in 1963.
The '40s and '50s saw advertising flourish with
tobacco companies hiring doctors and celebrities to
promote their products.
The history of tobacco marketing is really one
about appealing to young people and putting together
American values with a deadly product.
But it was the ultra masculine cowboy with a ten
gallon hat that may have had the biggest impact on
sales. Though the brand was originally aimed at female
smokers, 1955 saw the debut of the Marlboro Man ad
campaign starring lifeguards, sailors and
construction workers.
Marlboro Country ads appeared in 1963 and leaned
into the brand's cowboy persona. By the 1980s,
Marlboro was the best selling cigarette in the U.S
. and around the globe.
Other leading global tobacco companies today
include Philip Morris International, British
American Tobacco, Japan Tobacco and Imperial Brands.
But red flags started to appear.
Cigarette smoking was first linked to lung cancer in the
1940s and '50s.
Around the same time to reassure smokers that they
were being proactive about their health, tobacco
companies introduce filters.
Every 5 to 10 years.
The tobacco companies claim they're reinventing
themselves. It happens just as cigarette sales are
beginning to drop and prior marketing campaigns are no
longer working as well.
So in the '60s it was the introduction of filters.
Then it was introduction of low tar cigarettes.
In the '80s it was technological innovations.
A report from the U.S.
Surgeon General's office in 1964 concluded the average
smoker had a 9 to 10 fold risk of developing lung
cancer compared to nonsmokers.
For heavy smokers, the risk was 20 fold.
Growing pressure spurred Altria to diversify its
revenue stream.
In 1970, the company purchased Miller Brewing
Company. The following year, cigarette advertising
was banned on TV's and billboards.
In 1988, it acquired Kraft.
Two years later, smoking was banned on commercial U.S
flights. Tobacco company leaders, including Philip
Morris USA CEO William Campbell, testified to
Congress in 1994 that nicotine was not addictive.
Cigarettes contain nicotine because it occurs naturally
in tobacco. Nicotine contributes to the taste of
cigarettes and the pleasures of smoking.
The presence of nicotine, however, does not make
cigarettes a drug or smoking addiction.
Four years later to help recover health care costs
associated with smoking related illnesses, the
largest tobacco companies agreed to settle lawsuits
totaling more than $200 billion.
Following the decision, in 2003, Philip Morris changed
its name to the Altria Group and spun off its
overseas business, creating Philip Morris International
in 2008.
The move cleared PMI from legal and regulatory issues
in the U.S. and allowed Altria to focus on its
domestic market.
I think that there were multiple reasons why they
decided to separate the companies.
The international business was viewed as having much
stronger growth prospects because of higher smoking
rates internationally, fewer regulatory headwinds,
and that was one of the biggest concerns also in the
U.S. is the level of regulatory risk stemming
from the FDA and taxes.
Altria announced plans to spin off Kraft Foods in
2007, allowing the two companies to focus on their
respective businesses.
Miller is now owned by Molson Coors, and Altria
retains a roughly 10% stake in Anheuser-Busch InBev, the
world's largest brewer.
In an email to CNBC, the company said "As the
industry leader, our goal is to seize the opportunity
of harm reduction and fundamentally change the
landscape in a way that benefits our adult
consumers, our company, its shareholders and the
thousands of people we employ."
While Chinese pharmacist Hon Lik is often cited as the
inventor of the modern e-cigarette, Altria has been
trying to develop smoke-free devices for
years. Altria invested $12.8 billion for a 35%
stake in Juul in 2018.
Juul at the time had a more than 70% share of the
e-cigarette market.
I think that Juul is well positioned to be highly
successful in the future, and I think that over the
last year they've had a number of successes.
But that success was fleeting.
With teen e-cigarette use surging, Juul faced a series
of lawsuits and regulatory battles for allegedly
targeting minors.
Juul was forced to pay $462 million to settle those
claims. The company narrowly avoided bankruptcy
and Altria exited its stake.
CEO Howard Willard stepped down as head of Altria in
2020, and the company purchased e-cigarette
startup Njoy for almost $2.8 billion.
About $7 billion in e-vapor products were sold in the
U.S. in 2022.
At the time, more than 11 million people smoked
e-cigarettes.
Njoy has about 3% share of the e-vapor category, and
Altria sees a path where they can accelerate market
share through leveraging their sales and distribution
footprint.
Juul revolutionized the market.
It demonstrated that you could sell these products to
young people in very large numbers, that you could
addict them and that the government wasn't keeping
pace. We now today have in the United States a host of
products that use the technology or similar
technology to what Juul used.
And as a result, we see a rapid growth in those
products.
Altria has also tried to make inroads in the heated
tobacco market.
Those products are similar to cigarettes, where they
heat tobacco, but not to the point where the leaf
catches on fire.
In 2019, Altria launched Iqos domestically.
The device, which has the lion's share of the global
heated tobacco market, was originally developed along
with Philip Morris International when the two
were combined.
The device was banned in the U.S.
pending the result of a patent case by R.J.
Reynolds. Altria sold its U.S.
Iqos rights to PMI for $2.7 billion and now has a
partnership with Japan Tobacco to develop new
products.
Altria needs to maximize profitability on their
cigarette segment or their smokeable segment, the near
if not medium term because the time it takes to
complete an application for the FDA is years in the
making and the FDA approval process can take years also.
They have multiple initiatives to gain share of
the smoke-free market.
They acquired a company called On!
a few years ago.
On! is a nicotine pouch product and the category is
growing very quickly.
Altria is also working on developing products
internally. They're developing a product called
Swic, which is their own version of a heated tobacco
alternative.
In addition to its core business led by Marlboro,
which commands 42% of the U.S.
cigarette market. Altria also sells cigars under its
Black and Mild label and smokeless tobacco brands
like Copenhagen and Skoal.
Altria had net revenue of $25 billion in 2022, down
slightly from 2019.
Smokeable products made up 89% of revenue, while oral
tobacco products made up most of the remainder.
Cigarette and tobacco manufacturing is roughly a
$52 billion business in the U.S.
While smoking rates remain high in many countries like
the ones right here, in other markets, the number of
users has plummeted.
Swedish smoking rates dropped from 15% to less
than 6% over the past decade and a half, due in
part to the introduction of alternative smoke-free
products. New Zealand hopes to phase out smoking
entirely, banning tobacco sales to anyone born after
2008. U.S.
officials have taken steps to bring smoking levels down
domestically, too California, for example,
banned the sale of menthol cigarettes and flavored
tobacco products.
In 2017, the FDA announced a roadmap to ban menthol
cigarettes nationally, as well as limit the amount of
nicotine in cigarettes.
Those plans cost Altria's stock price to plunge.
Eliminating menthol and other flavors from
cigarettes would really decrease their appeal to
young people, and it would also address some of the
problems in terms of equity in the cigarette market.
So we know that the tobacco companies really did
predatory marketing towards certain groups, particularly
African Americans, Pacific Islanders, LGBT, and that
those groups disproportionately smoke
menthol cigarettes.
Altria and its peers face other headwinds too.
Widespread inflation has impacted volumes, driving
some consumers away from premium brands, like
Marlboro Red, toward lower priced cigarettes.
And in addition to those headwinds, questions remain
about how toxic devices like e-cigarettes and
heat-not-burn products really are.
E-cigarettes and heated tobacco products are still
harmful. The tobacco companies are in a unique
position where they were allowed to put these
products on the market before there was really a
full set of evidence about the harms.
So they've basically made people in the world into
guinea pigs for new products.
While these products do have lower levels of some
toxicants, that doesn't necessarily mean they're
going to cause less disease.
We won't know for a long time what the net effect of
these products are.
But what we have seen is so far these products have
brought literally millions of kids, kids who never
would have smoked cigarettes, into the
marketplace. For these kids, these products are
certainly more dangerous than not smoking.
More than 2.5 million middle and high school students
used e-cigarettes in 2022, with the vast majority using
flavored products.
I think that what will happen is that there's going
to be continued fragmentation in nicotine
consumption and people will use different products at
different points in the day and there are going to be
complementary. I think it's also important to keep in
mind that we do have over 30 million smokers in the
U.S. and we've had e-vapor products on the market for
years at this point and they haven't been successful
in converting smokers.
What you see is that the companies distract us with
e-cigarettes and these new products that appear to be
safer, but really they are very motivated to keep
combustible cigarettes full of nicotine and menthol
still on the market because that's where the money is.