Altria and Philip Morris International recently announced that they would expand their agreement to sell e-cigarettes. This deal isn’t surprising since the two companies used to be a single entity. Altria, which generates all of its sales domestically, spun off its overseas operations as PMI back in 2008. Two years ago, Altria granted PMI the exclusive right to sell its e-cigarettes overseas in return for the right to sell two of PMI’s heat-not-burn tobacco products in the United States. Under the new agreement, both companies will also share their research, development, and technologies to jointly produce new e-cigarette products. Will this new partnership help both companies diversify away from traditional cigarettes?
The business of e-cigarettes
Reynolds American‘s Vuse brand is currently the market leader with 36% of the US e-cigs market according to Nielsen’s May figures. Vuse was notably one of the first e-cigs to regulate puffs and deliver consistent flavor with a computer chip. The second most popular brand is Blu, with 23% of the market. Lorillard sold Blu to Imperial Tobacco prior to its acquisition by Reynolds. The third largest player is Japan Tobacco‘s Logic, with a 14% market share. Only Lorillard has reported e-cig sales separately. During the first quarter of 2015, it stated that sales of its Blu e-cigarettes fell 45% annually to $28 million due to aggressive competition. By comparing that figure with Blu’s market share, we can assume that e-cigs aren’t generating much meaningful revenue for the top players in the US. The entire worldwide e-cigs market was only worth $1.4 billion last year, according to Nielsen. By comparison, Altria and Philip Morris respectively generated $24.5 billion and $80.1 billion in revenues last year.
Where does that leave Altria and PMI?
Altria entered the e-cig market last year with its MarkTen brand, which only claimed about 6% of the U.S. market. It also acquired premium e-cig brand Green Smoke last year to complement Mark Ten’s growth. Last year, PMI acquired U.K. e-cigs maker Nicocigs, which controlled over a fourth of the nation’s e-cig market. It sells Altria’s MarkTen as Solaris in Spain. It also introduced its iQOS e-cigarette in Italy and Japan. But unlike traditional e-cigarettes, which vaporize nicotine cartridges into water vapor, the device heats a tube of tobacco known as a Marlboro Heatstick. Since the tube doesn’t burn the cigarette and produce smoke or ash, it’s arguably ‘healthier’ than traditional cigarettes. A pack of 20 Heatsticks costs about the same as a pack of traditional Marlboro cigarettes. Altria and PMI’s 2013 agreement diversifies both companies’ e-cig portfolios. Altria can sell heated tobacco products to Americans who aren’t accustomed to e-cigs, while PMI can sell Altria’s vapor-based products overseas. Sharing R&D and tech will also reduce expenses at both companies. That’s important for tobacco companies like Altria and PMI, which often use price hikes and job cuts to offset declines in cigarette shipments. Read full article