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Altria Focuses on Pricing & RRPs Amid Low Cigarette Volumes

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With cigarette volumes reducing due to stern regulations and consumers’ rising health consciousness, Altria Group, Inc. MO has been focusing on aiding its performance through strong pricing and reduced risk products (RRPs).

Declining Cigarette Volumes a Concern

Declining cigarette sales volume has been a concern for Altria.  During the third quarter of 2019, total smokeable product shipment volumes declined 6.5% from the prior-year quarter. Reported domestic cigarette shipment volumes dropped 6.6% year over year due to adverse trade inventory movements, the cigarette industry’s rate of decline and retail share losses. Cigarette shipment volumes are being affected by anti-tobacco campaigns and increased consumer awareness regarding the harmful impacts of tobacco consumption. Regulatory hurdles are also a vital factor limiting the marketing of cigarettes, thereby adversely impacting its sales volume.

The tobacco industry has been facing many challenges as governments around the world are imposing restrictions on tobacco companies, which in turn are lowering cigarette consumption. The U.S. Food and Drug Administration (FDA) has made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking. In fact, per court orders, Altria along with other cigarette makers like Phillip Morris (PM - Free Report) has been directed to put up self-critical advertisements on television and newspapers to dissuade customers from smoking.

To add to the woes, the FDA is now bent on drastically reducing nicotine in cigarettes to minimally addictive levels. Apart from these, the FDA had earlier announced that tobacco makers must seek marketing authorization for any tobacco product introduced after Feb 15, 2007. The law was extended by the agency to include e-cigarettes, pipe tobacco, cigars and hookah.  Moreover, the European Union and the FDA proposed a ban on menthol following the Tobacco Control Act, which essentially states that menthol cigarettes have an adverse impact on public health. Additionally, the agency raised concerns regarding the consumption of e-cigarettes among youth.

Growth Efforts Underway

Rising health consciousness has pushed consumers toward low-risk, smokeless tobacco products. Altria has been responding to the changing market scenario by offering several RRPs. In this respect, the marketing and technology sharing agreement between Altria and Philip Morris, pertaining to the sale of IQOS in the United States, has been approved by the FDA. Additionally, Altria, through its subsidiary Helix Innovations, completed the acquisition of an 80% stake in certain companies of Burger Group, which is engaged in the commercialization of the oral tobacco-derived nicotine (TDN) pouch product — on!

Further, Altria is making efforts to expand in the cannabis industry. This is evident from the acquisition of stakes in the Canadian cannabis company, Cronos Group, for nearly $1.8 billion. We expect Altria’s efforts to strengthen presence in the nascent but booming cannabis space to boost growth in the forthcoming periods. Markedly, revenues from the smokeless product category have been steadily rising. During the second and the third quarters of 2019, revenues in the unit advanced 4% and 5.8% year over year, respectively.

Apart from this, Altria’s strong pricing has helped it stay afloat in the industry, even in the face of declining cigarette volumes. Though higher pricing might lead to a decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes. In third-quarter 2019, higher pricing aided performance of the smokeable and smokeless segments. In fact, higher pricing was a prime catalyst for top line and adjusted OCI growth in the quarter and is expected to boost performance in the days ahead.

All said, let’s see how far these initiatives can help Altria completely offset the aforementioned woes. Notably, this Zacks Rank #3 (Hold) stock has gained 13.8% in the past three months compared with the industry’s growth of 16.8%.

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