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Altria (MO) Sees Growth in Low-Risk Products, Pricing Aids

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·3 min read
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Amid dwindling cigarette sales volumes, tobacco companies like Altria Group, Inc. MO have managed to stay afloat on rising popularity of low-risk tobacco alternatives. Markedly, Altria is gaining from growth in its oral tobacco category and other reduced risk products (RRPs). Additionally, strong pricing for tobacco products have been an upside for the company. Let’s delve deeper.

Growth in Low Risk Products Bodes Well

RRPs, known to be the next-generation tobacco products, have been gaining popularity owing to their less detrimental impacts on health. Consumers are increasingly inclining toward RRPs in a bid to quit cigarettes. Altria has been undertaking measures to expand in this arena. The marketing and technology sharing agreement between Altria and Philip Morris International Inc. PM, pertaining to the sale of IQOS in the United States, is noteworthy.  IQOS is one of the leading RRPs in the industry. We note that the FDA approved the marketing of IQOS and HeatSticks as Modified Risk Tobacco Products in July 2020. Also, the FDA’s authorization regarding sale of IQOS 3 in the United States is encouraging. Altria, through its subsidiary Philip Morris USA, Inc., is striving to make IQOS available across more stores in the United States.  We note that other tobacco companies such as Turning Point Brands, Inc. TPB and British American Tobacco p.l.c. BTI have been expanding their offerings in the low-risk tobacco space.

Altria has also been undertaking efforts to expand oral tobacco offerings. The company, through its subsidiary Helix Innovations, has full global ownership of on! — a popular tobacco-derived nicotine (TDN) pouch product. Management believes that on! is a worthwhile addition to Altria’s smokeless portfolio as oral TDN products are gaining popularity in the United States owing to their low-risk claims. Notably, on! was sold in more than 93,000 stores by the end of first-quarter 2021. The company is also making efforts to expand in the cannabis industry. Markedly, the company acquired stakes in the Canada-based cannabis company, Cronos Group.

Prudent Pricing is a Key Catalyst

Strong pricing for tobacco products has been a significant upside for Altria. During first-quarter 2021, higher pricing aided growth in revenues and adjusted operating companies income (OCI) in the oral tobacco product segment. In the said quarter, higher pricing contributed to the company’s smokeable category revenues, which was otherwise battered by weak shipment volumes. Though higher pricing might lead to possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes. Consistent gains from pricing power are likely to keep supporting the company’s revenues in the forthcoming periods.

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