Altria Group: Unaffected From The Price Hikes

Dec.19.13 | About: Altria Group, (MO)

Altria Group (NYSE:MO) raised prices, effective December 1, 2013, due to the rise in tobacco taxes in the U.S. It reduced off-invoice promotional allowance by $0.07 per pack on Marlboro and L&M, while it raised the list price by $0.06 on Marlboro Snus Tins and by $0.07 on other cigarette brands. Altria also raised prices in June this year, which had a minor impact on its market share. The below table consists of Altria's segmental revenue and their retail market share in the U.S. for its second and third quarter of fiscal year 2013.

Smokeable products

Third quarter for fiscal year

Second quarter for fiscal year

2013

2012

Change

2013

2012

Change

Net Revenues ($ million)

5802

5613

3.40%

5678

5903

(3.8%)

Retail Market Share

Total Cigarettes

50.70%

50.50%

0.20%

50.70%

50.40%

0.30%

Total Cigars

29.70%

30.80%

(1.1%)

30.00%

30.50%

(0.5%)

Click to enlarge

Smokeless products

Third quarter for fiscal year

Second quarter for fiscal year

2013

2012

Change

2013

2012

Change

Net Revenues ($ million)

485

437

11.00%

458

426

7.50%

Total Retail market share

55.10%

55.40%

(0.3%)

55.00%

55.00%

--

Click to enlarge

In June this year, the company reduced off-invoice promotional allowances on Marlboro and L&M brands by $0.06 per pack, and raised list prices on all other brands by $0.06. Despite this price hike, Altria's revenue for smokeable and smokeless products improved in the third quarter of 2013 year over year, and the market share for these products had minimal impact. Its net revenue from the smokeable and smokeless segments improved 2.18% and 5.89% respectively quarter over quarter. This is mainly due to the pricing power the company holds in the U.S. tobacco industry, which enables it to pass higher taxes on its customers. I expect that Altria will continue to post improved year over year revenue in its fourth quarter of fiscal year 2013 too, and the market share of its smokeless and smokeable brands won't be impacted much despite the price hike.

E-cigarettes

E-cigarettes is expected to become a market worth $10 billion by 2017. In 2013, e-cigarettes worth $1.7 billion have been sold in the U.S. Altria Group has established a tobacco company named NuMark that sells its electronic cigarette under the "MarkTen" brand. The MarkTen e-cigarette sells for $9.50, and it comes with regular and menthol flavors. Currently, Altria is selling MarkTen through its 3,000 stores in Indiana. The e-cigarette will be available across 2,000 stores in Arizona by the end of this year.

When it comes to cigarettes and smokeless products, Altria remains a preferred brand in the U.S. with over 50% market share in cigarettes and smokeless products. Altria can use this brand preference and its distribution channels to develop its MarkTen brand. I expect that as the E-cigarette trend moves across the U.S., Altria will be able to capitalize on this opportunity through its MarkTen stores. Further, the company will be able to design its e-cigarettes as per FDA norms that could be issued soon.

Competitors

Lorillard (NYSE:LO) has increased retail distribution of its Blu Ecigs product to more than 127,000 retail outlets across the U.S. The company gained access to e-cigarette brand Blu Ecigs through its acquisition in April 2012 for $135 million. Lorillard has a market share of 49% in the U.S. e-cigarette market, and it used its distribution network for Blu Ecigs sales. The Blu Ecigs kit comes with a USB charger and car charger and costs $69.95, whereas its Starter Pack costs $34.99. The revenue from Blu Ecigs totaled $63 million in the third quarter of fiscal year 2013, a 450% increase year over year. Lorillard has the first mover advantage in the U.S. e-cigarette market, as it has established a dominant position that will enable it to tap larger opportunities and control pricing in this industry. I expect that Lorillard will use its distribution network to expand Blu Ecigs across the U.S., which can increase its market share further.

Reynolds American Inc (NYSE:RAI) will expand its e-cigarette VUSE to Utah by the middle of January 2014. The company sells VUSE via its subsidiary RJ Reynolds Vapor. VUSE Solo, a pre-charged ready to use e-cigarette costs about $10, and the VUSE System costs $30 and comes with three flavor cartridges, a rechargeable power unit, and a case. The company will launch a marketing campaign for VUSE after expansion in Utah. I expect that Reynolds American will be able to tap opportunities in the e-cigarette segment since it launched its brand to compete with other players in this industry.

Conclusion

The recent price hike will not impact Altria Group's revenue in the fourth quarter of fiscal year 2013, since the company has maintained the dominant market share in the U.S. tobacco industry. The e-cigarette industry is in a developing stage in the U.S., and it has potential to grow. The company can use its distribution network and brand preference to develop the MarkTen e-cigarette as an additional revenue generator.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.