Altria Group, Inc. (NYSE:MO) is strategically positioned to capitalize on its lineup of smoke-free products and pricing strategies. The company’s robust performance in the second quarter of 2023 underscores its resilience in the face of cost inflation and declining cigarette sales.
Effective Pricing Strategies
Altria’s ability to implement effective pricing strategies has enabled it to maintain stability, even amidst declining cigarette shipments. While higher prices could potentially impact cigarette consumption, the addictive nature of cigarettes tends to buffer the effects of price increases.
During the second quarter of 2023, increased pricing provided a boost to revenues in the Smokeable Products and Oral Tobacco categories, which had otherwise suffered due to lower sales volumes. This higher pricing contributed to improved adjusted operating income (OCI) across both segments.
Transition Towards Smoke-Free Alternatives
Consumer preferences have shifted towards reduced-risk products (RRPs) and smoke-free alternatives due to the well-known health risks associated with traditional smoking. Altria has adeptly responded to this evolving market by introducing a range of oral tobacco, e-vapor, and heated tobacco products. In the second quarter of 2023, net revenues in the Oral Tobacco Products category saw a year-over-year increase of 2.3%, reaching $680 million.
Through its subsidiary, Helix Innovations, Altria holds global ownership of on!, a popular tobacco-derived nicotine (TDN) pouch product that is gaining traction in the United States for its lower-risk claims. Altria continues to expand production capacity and commercial availability of this product, with second-quarter shipment volumes for on! experiencing a remarkable growth of approximately 50%.
Within the smoke-free product category, Altria’s management is actively exploring strategies to establish a competitive presence in the significant e-vapor sector. According to the company’s second-quarter earnings call, e-vapor remains the most successful smoke-free category in the United States, as it effectively attracts smokers away from traditional cigarettes. Altria’s acquisition of NJOY Holdings is a noteworthy move in this direction, particularly with NJOY ACE, the sole pod-based e-vapor product currently authorized for marketing by the FDA.
Altria successfully completed the acquisition of NJOY Holdings, Inc. on June 1, 2023, with plans to execute its commercial agenda for NJOY in the latter half of the year.
Cigarette Volume Challenges
Altria’s second-quarter earnings release acknowledged the broader cigarette industry’s struggle in the face of an inflationary environment, impacting spending patterns among Adult Tobacco Consumers (ATCs). As the external landscape remains dynamic, Altria continues to assess economic factors including elevated inflation rates, higher interest rates, global supply-chain obstacles, and shifts in ATC behavior such as purchasing habits, adoption of smoke-free alternatives, and disposable income levels.
Moreover, rising health consciousness among consumers and a growing preference for low-risk tobacco alternatives have led to a decline in cigarette volumes. In the second quarter of 2023, net revenues in the Smokeable Products category experienced a year-over-year decrease of 30.9%, amounting to $5,820 million. This decline was primarily attributed to reduced shipment volumes and increased promotional investments, partially offset by higher pricing.
Domestic cigarette shipment volumes witnessed a decline of 8.7%, primarily due to industry-wide decreases and retail market share losses. These losses were partially mitigated by trade inventory movements. The industry’s decline and retail share losses were attributed to macroeconomic pressures affecting ATCs’ disposable incomes. After accounting for trade inventory movements and other factors, the estimated overall decline in domestic cigarette industry volume stood at approximately 7.5%.
Moving Forward
Altria’s strategic pricing approach and robust smoke-free product portfolio position the company favorably to navigate challenges related to declining cigarette volumes. For the entirety of 2023, the company anticipates an adjusted EPS within the range of $4.89 to $5.03, reflecting a growth of 1-4% from the recorded $4.84 in 2022.
Over the past year, shares of Altria have experienced a decline of 2.6%, outperforming the industry’s broader decrease of 4.5%.
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