Marlboro maker Altria doubles down on vape bet after losing billions with Juul

SIMONE DEL ROSARIO: A TOBACCO GIANT IS DOUBLING DOWN ON ITS E-CIGARETTE BETS. 

ALTRIA GROUP – THE MARLBORO CIGARETTE MAKER, IS PUTTING UP AT LEAST $2.75 BILLION TO BUY STARTUP VAPE MAKER NJOY HOLDINGS.

BUT THAT’S NOT THE WILDEST PART OF ITS WEEK.

THE NEWS COMES AFTER ALTRIA DIVESTED ITS DISASTROUS E-CIG STAKE IN JUUL, WHICH TUMBLED FROM A $12.8 BILLION VALUATION IN 2018 TO A MERE $250 MILLION UPON CASHOUT.

LIKE ALTRIA’S INVESTMENT, JUUL’S BEEN ON A DOWNWARD SPIRAL, FORCED TO PAY A NEAR HALF BILLION DOLLAR SETTLEMENT OVER MARKETING TO KIDS. AND ITS FDA BATTLE OVER A PRODUCT BAN.

NJOY – MEANWHILE, IS ONE OF JUST A FEW E-CIG BRANDS WITH REGULATORY APPROVAL.

LET’S BRING IN SENIOR ANALYST WILLIAM DENSMORE, WHO COVERS FOOD BEVERAGE AND TOBACCO FOR FITCH RATINGS.

Bill what makes NJOY the move for Altria after being so badly burned by Juul?

BILL DENSMORE: Let’s kind of frame the opportunity for E vapor at this point. I mean, you’re looking at a category that has more than 10 million adult users in the US and represents roughly 15% of total tobacco volumes did that is roughly a 7 billion total sales. And it’s expected to grow come in the low single digits over the next decade as a category that represents a sizable opportunity. And it’s one that Altria couldn’t ignore, particularly given the lack of clarity around Juul in the past failures, which you kind of alluded to that may be significant generation developments, next generation product portfolio. I mean, these were 15 billion in past investments that did not pan out. This is also a category that experienced significant disruption and volatility during the past few years due to regulatory crackdowns, and is currently in what we call a kind of evolving stage. Now that retrenchment in 2019. And 20 followed very strong growth driven by Juul that was just not sustainable, given the strong uptake of flavors that were removed from the market. And the youth usage.

SIMONE DEL ROSARIO: Given how catastrophic its investment in Juul was and the decline, though, does that hurt Altria standing in this space at all? Or do they walk away with even a little victory at this point, as they try to move forward from it?

BILL DENSMORE: That certainly has a dented credibility with investors. So maybe let’s look at kind of the rationale around this transaction. And Altria made it very clear a few of the key aspects, you know, first, they paid for regulatory certainty with you know, NGO authorized orders from the FDA for six brands. This is the large hurdle given that burdensome kind of long review process by the FDA. Second is control Altria controls their destiny with 100% ownership versus the minority they had in Juul. Third, it doesn’t come with the those thorny issues that Juul did with more minimal youth usage relative to other brands. Now, if you look at you know, what about the brand, is this a something that they can grow? You know, what Altria is betting on is NJOY is solid brand is under index, lower awareness, unlimited distribution, mean, this is a playbook that we see with other CPG companies, you know, of us that go out and acquire small brands and then leverage their capabilities internally to grow being NJOYs only in a quarter the retail locations compared to views as a small sales force. You know, Altria’s research indicates that NJOY is at least on par with its nearest competitors. Now where Altria has significant muscle, it’s their commercial resources, what’s the marketing distribution and sales? This is where Altria could grow at rates much higher than the outlook for the vapor category, which is the low single digits by driving increased distribution and taking share.

SIMONE DEL ROSARIO: As we look at the landscape, though there are just tons of legislative attacks against flavored tobacco products from California to New York. Is this alternative market still a viable and growing part of the sector given all of the bumps?

BILL DENSMORE: Yeah, if you look at, I think it’s best to kind of frame things on a national basis, because you can get a little bit more noise on a state by state basis. I mean, the tobacco industry talks about a smoke free future with Next Generation products that have a much lower risk profile. You know, this is in line with the FDA risk continuum for reduced risk products. How the tobacco industry, including Altria generates its cashflow is structurally changing as it moves to next generation products. Now, we see this as more acute in the tobacco sector, given the stage in the lifecycle of where we’re at the outsize risks that comes with combustible tobacco products. Therefore, as we look, you know, the key longer term risks over the next decade is around altria’s ability, or really the industry, to maintain that long term industry share through this migration. So time is going to tell how successful they are at kind of this next phase of developing their next generation products.

SIMONE DEL ROSARIO: Yeah, when you look at the perception of the tobacco industry nationwide, and in the media, especially it seems like obviously, it’s facing a lot of challenges. There’s a lot of health challenges people moving away from the industry. But despite that narrative, the tobacco industry itself is expected to grow to more than 900 billion by 2028. Right there in that timeframe that you were talking about. So what is the path forward for the industry at this point?

BILL DENSMORE: Well, that’s kind of going back to what I’ve talked about my previous is building out these next generation product portfolios with reduced risk products that have much lower health risk, that’s going to be key. We’re seeing regulatory movement across the globe toward reducing those sorts of risks. So the tobacco industry is responding to those. It’s a matter of how that cash flow stream and how those products develop over time as far as what that actually looks like.

SIMONE DEL ROSARIO: Bill Densmore, Senior Analyst for Fitch Ratings, thank you so much.