Altria: Up in Smoke
By: Candice Chow & Kyra Gilson
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
A Blazing Industry
Controversy has surrounded the tobacco and nicotine industry for the past few decades, with conditions such as health disease, strokes, and cancer all being explicitly linked to smoking. Adult smoking prevalence continued to rise until the mid 1960’s where extensive public health campaigns have since driven a reduction in smoking. With this shift in health-conscious consumer preferences, conglomerates such as Philip Morris—now restructured as a holding company dubbed the Altria Group—have taken strides to dissociate their non-tobacco product arms with their tobacco businesses. This movement was followed by reassurances that the company’s strategic priorities involve a smoke-free future, implying the eventual termination of its tobacco business. Alongside this monumental swing in consumer attitudes and subsequently hardened business attitudes towards smoking, smoking cessation aids have also increased in prevalence. Aids such as nicotine patches, nasal spray, and most recently e-cigarettes have all become widely accepted ways to reduce cigarette usage.
Unfortunately, aids such as e-cigarettes have more recently demonstrated unintended consequences. Youth vaping has exploded despite regulation now on par with tobacco products and control of e-cigarette distribution, leaving many wondering whether e-cigarette companies have truly had a net positive impact in the fight against nicotine consumption. Faced with increasing public scrutiny, vaping companies must demonstrate to the public that they can keep e-cigarettes out of the hands of children and youth, or risk severe governmental regulation damaging their profitability.
Altria Group & Juul: A Toxic Combination
Altria Group, Inc. is one of the world’s largest producers and marketers of tobacco products with brands such as Marlboro, Black & Mild, and Copenhagen. It sells tobacco products to wholesalers and large retailers. As health concerns regarding traditional cigarettes sparked a movement discouraging smoking, Altria made the strategic decision to enter the e-cigarette market and later began producing oral nicotine pouches. Altria faced difficulties early on, with trouble securing patents for its heat-not-burn tobacco device and the suboptimal uptake of its own e-cigarette, the MarkTen Brand. The company began looking to acquire an e-cigarette company to avoid long development times, as well as the high startup and Research and Development (R&D) costs. In December 2018, Altria invested $12.8 billion for a 35 percent stake in Juul.
Juul Labs was originally founded in 2007 by two Stanford graduate students whose product design thesis was on the “future of smoking.” In 2015, the Juul was introduced with the hopes of creating an alternative for smokers who wanted to quit as the founders recognized that there was no real alternative for cigarettes. Vaping is widely considered less harmful than smoking as many of the toxic and carcinogenic chemicals in tobacco are released when tobacco is burned. At its core, Juul's e-cigarette was similar to other vaporizers on the market; however, they set themselves apart by introducing a slim, discrete device that contained nicotine salts which delivered a stronger effect. Containing five to eight times higher nicotine than other tobacco products, “Juul emulates a cigarette in a way that no competitor can”. By 2018, Juul’s market share increased to 75 percent.
Combining the largest U.S. cigarette manufacturer with the largest U.S. e-cigarette company, Altria was positioned to become a key player in the vaping segment. As a merger, Altria was subject to a six-year agreement and bound to participate in vaping products exclusively through Juul. This deal placed Altria’s MarkTen e-cigarette as a direct competitor, leading to the termination of the company's personal vaporizer brand. However, due to antitrust scrutiny by the Federal Trade Commission (FTC) and issues under the purview of the U. S. Food and Drug Administration (FDA), it was not long until Altria took an unfavourable turn in its stake with Juul. Following FDA’s ban on Juul products in 2019, Altria's shares declined by about 7 percent, representing a loss of nearly $6 billion in market value.
Regulatory Mess
In the same year, the FDA declared youth vaping an epidemic and imposed requirements for e-cigarette makers to draft action plans to combat use amongst youth. This ultimately led Juul to pull all flavoured products from retail stores aside from tobacco, mint, and menthol. In 2019, the FDA criticized Juul for playing a large role in the 78 percent increase in e-cigarette use among high school students and the 48 percent increase among middle schoolers. Juul's lack of proper age screening protocol led to a ban on selling the company’s most popular flavours. This included “sweet” flavours such as mango, fruit medley, and mint, which were attracting middle and high schoolers to the highly addictive product, thus deviating from Juul’s goal of providing an alternative to smoking tobacco. By 2020, Juul’s market share shrunk to 42 percent from its peak of 75 percent in 2018. While many e-cigarette companies operate in North America, Juul suffered the most due to its advertising campaigns, which critics have claimed were targeted towards youth.
While Juul has repeatedly reported that its campaigns were not targeted towards a younger demographic, its first ad campaign, “Vaporized,” indicates otherwise. “Vaporized” featured socialites and influencers like Bella Hadid and Leonardo DiCaprio, who were featured on a Times Square billboard partying using the devices. Juul continued with a six-month sampling tour in concerts, clubs, and rooftop bars which helped further bolster the company’s presence on social media. Much of Juul’s success was attributable to its ability to capture consumers in their 20s and early 30s who previously had low smoking rates. As Juul gained popularity through influencers campaigns, their consumer group evolved into teenagers and young adults with no smoking history, who quickly became regular nicotine consumers due to its highly addictive nature.
As the FDA cracked down on critical players who contributed to the vaping epidemic, Juul’s management began recognizing the parallels between its campaigns and the old cigarette ads that featured young and attractive models. These problems were further exacerbated as Juul’s employees were found to only have advertising experience for technology companies and had little experience navigating marketing campaigns in the highly regulated tobacco industry. However, the staff were unable to learn from the mistakes of their campaigns glamourizing tobacco products in time, which led to the inevitable FDA crackdown and fall in the Juul’s value.
A Forward Look for Altria and Juul
The future for Altria and Juul is full of uncertainty, with Juul losing approximately 95 percent of its value since Altria bought a 35 percent stake in the company in 2018.
As Juul waits for the FDA marketing-denial order to be overturned, its financial future remains bleak. The company is facing hundreds of millions in lawsuits for its role in increasing youth vape use. In an attempt to prop up declining cash reserves, Juul plans to cut its operating budget by 30-40 percent and lay off 400 employees. While the company did receive a fresh cash injection, allowing the company to fend off bankruptcy, The FDA’s marketing ban combined with large cash outflows has left the company in a precarious position.
Altria dissolved its non-compete clause with Juul in September 2022, providing the parent company with the opportunity to buy another e-cigarette company or develop its own vaping products. With this clause, Juul now has the freedom to sell itself to another tobacco company or adopt a new strategy with or without Altria. While Juul’s value has been drastically cut, Altria still retains its economic investment in Juul, leaving the company exposed to further impairments and write downs. However, there may still be some hope left for Altria with analysts expecting the U.S e-cigarette retail market to double by 2030. E-cigarettes remain the key to profitability in the nicotine industry and with the overturn of the FDA marketing-denial order looking less realistic each day, Altria should reposition their e-cigarette market strategy to reaffirm their historic market-leader position in this lucrative space.
A Myst Opportunity
Founded in 2019 by Dr. Chenyue Xing, a co-creator of Juuls’ nicotine-salt technology, Myst Labs is a significant R&D source for the electronic cigarette industry at large. Myst Labs currently targets the world’s largest smoking nation, China—a country with one of the strictest regulations on e-cigarettes—but also operates in the UK and Canada.
As Xing played a role in Juul’s rise and fall, she understands the importance of discouraging youth from starting to use vape. The company has already established a “Youth Nicotine Prevention Program” in which the company promises not to encourage non-nicotine users, and to support effective legislation and regulation by protecting minors from purchasing, in addition to the placement of a prominent nicotine label on its packages. Myst Labs’ emphasis on discouraging youth vaping positions the company as a beneficial acquisition for Altria, as Juul’s reputation of appealing to youth began from the launch of its initial campaign.
Myst Labs carries three vaporizer devices, two disposables, and three single-use pod systems. These products are offered at competitive prices, with the cheapest vaporizer sold for $16.11 CAD. Myst Labs’ flagship product, Nicotine X Plus, differentiates its e-cigarette from competitors; it boosts the delivery of a more satisfying draw with less nicotine, as compared to competitors. Myst Labs’ second product, Nicotine Y, improved ingredients to enable users to experience authentic tobacco flavours, further incentivizing current smokers to switch.
Given Myst Labs’ experience in abiding by strict government regulations, its “Youth Nicotine Prevention Program,” and its innovative product offering, the company would be a beneficial addition to Altria’s plethora of companies as FDA regulations continuously change. Additionally, as further regulations are imposed in China, Myst Labs may be incentivized to refocus out of China to increase profitability. The company would also benefit from additional financial support from the tobacco giant Altria to ensure that the company can mitigate its costs.
Altria currently benefits from a healthy cash position with $4.6 billion as of December 31, 2021. Furthermore, Altria has a favourable interest coverage ratio of 11.48x, indicating it is still capable of paying off this debt with room to continue to make small strategic acquisitions. Given Altria’s financial position, the company is well-positioned to acquire and manage an e-cigarette company.
Fixing Altria’s Myst-akes
To keep e-cigarette market share while avoiding another public relations disaster, Altria should divest Juul and acquire Myst Labs. With Myst Labs’ focus on smoking cessation—contrary to Juul’s vaporizers being a starting point for smoking—Altria can remain competitive and avoid regulatory backlash.
As Altria experienced first-hand through Juul, selling e-cigarette products directly to consumers is fraught with risk; Altria should instead look to sell to smaller e-cigarette businesses. This shift will push Altria away from the spotlight and allow the company to be fully removed from the problems it has faced in the past, such as misleading advertising. Despite the downfall of Juul, the pro-forma company’s core capabilities appear strong. The e-cigarette industry is still in its early innings and technological developments are still very much in the works. Smaller players in this industry who are selling directly to consumers may not have the capital budget to make new advancements and adapt to trends. This is where Myst Labs comes in with its qualified scientists and a strong R&D spend. Upon the development of a new innovation, Altria should patent it then licence it to B2C companies. The B2C consumer would have a strong reliance on Altria as they ultimately want to sell the best product available on the market.
A Myst Labs acquisition also presents a greater opportunity for research and development in vaporizer technology with Dr. Chenyue Xing’s experience innovating in this space. The value of Myst Labs’ products to an e-cigarette company will be the innovative technology behind their hardware, meaning this increased capability for R&D will be key to remaining competitive. Notably, Myst Labs’ founder having recognition for reducing nicotine levels in vaporizers while maintaining the sensation of a high-nicotine product will be attractive for the B2B consumer with the looming threat of FDA crackdowns for a product’s addictive properties.
Altria’s Path to Cloud Nine
Altria is no longer riding Juul’s high; it’s time for Altria to shift its position away from the consumer-facing e-cigarette market to recover from its public relations and regulatory disaster. With Myst Labs’ R&D capabilities and strong reputation for smoking cessation, the vaporizer company is the ideal candidate for Altria’s move to B2B e-cigarette sales. The acquisition of Myst Labs and strategic shift to B2B will clear the smoke to position Altria for future success in the e-cigarette market.
