Altria – the domestic side tobacco giant Philip Morris, the largest maker of cigarettes in the United States – has spent a great deal of time facing the long-term problem of fewer smokers each year buying fewer cigarettes. While this may be great for the health of the average American, it isn’t the best story for a business. The company responded by squeezing every bit of profitability out of its sales while paying a handsome dividend to shareholders according to Forbes Magazine.
Over the past 10 years, vaping has shifted from being a relatively insignificant business to the fastest growing product in the space. While it is still small relative to traditional cigarettes, vaping changes that story, outlook and path forward for tobacco companies with potential in both the nicotine and cannabis delivery spaces. Big tobacco companies continue to try to establish themselves in the space as well with new products both domestically and overseas.
Moving into Vaping makes sense. Vaping offers benefits for both the business and the consumer. From the business perspective, it is a high margin business with better shelf life than traditional cigarettes. For consumers, vaping does not stick to your clothes the way traditional cigarettes do, meaning a smoke break doesn’t result in your jacket smelling like an ash tray. Most importantly, the carcinogens that cause cancer in traditional cigarettes are created by burning tobacco, i.e. combustion. When a consumer is vaping, there is no burning so there is evidence that vaping has a reduced risk of cancer relative to traditional cigarettes.
However, vaping is not a silver bullet for public health concerns or tobacco companies’ revenues streams. As more studies are done, scientists are learning about the cancer risks of these products. For one thing, there is a potential link between some particular carcinogens and the amount of voltage that is applied to the product. Some vaping products may produce more carcinogens than others, though still at a lower overall level than traditional cigarettes. There will be more research done in the space to find out the risks as the industry works to make products that further reduce the cancer risks associated with consumption.
An additional problem with vaping involves teens. Traditional smoking has been falling for years among teens. That trend continues as, according to the CDC, high schooler smoking fell from 15.8% to 7.6% between 2011-2017. However, vaping’s popularity among teens has outstripped much of the recent reductions in traditional cigarettes as e-cigarette usage has risen from 1.5% to 11.7% over the same period. Vaping has significantly offset the progress that has been made in the fight against teen smoking. This is more alarming as some studies indicate that vaping can significantly increase the chances that an individual will switch to traditional cigarettes over time. The FDA has been doing everything it can to warn the public about this trend and stop teens from picking up the nicotine habit, going so far as to issue a warning in September to e-cigarette makers that they must do more to keep their products away from minors.
Which leads us to Altria’s announcement on October 25th that they would discontinue most of their flavored e-cigarettes and provide support for a 21-year-old age limit for tobacco and vaping products. Altria will only sell menthol, tobacco and mint flavored vaping products going forward. Flavors such as “Vineyard Blend” and “Mardi Gras” will be going away. These other flavors only contribute about 20% of Altria’s sales in the space so it is a small price to pay to get on the FDA’s good side. Altria steps out of the way in a space that they have limited impact while other companies deal with the FDA on the teen vaping problem.
Meanwhile, the company can focus on gaining domestic approval for the “IQOS” system developed by Philip Morris International, which Altria plans to distribute in the United States. IQOS is an alternative tobacco product that heats real tobacco without burning it, resulting in tobacco flavor and nicotine, but significantly reduces or eliminates carcinogens. This is a far more important product for the company that has shown success in overseas markets. Giving up flavored e-cigarettes seems unlikely to sway the FDA’s decision on approval for IQOS, but a little extra favor can’t hurt.
Overall, Altria has made a big announcement that really doesn’t affect them very much. Their products are not the ones that are behind the explosion in teen vaping though Altria will benefit if those teens switch to regular cigarettes over time. Discontinuing a few flavor pods makes them look good while they focus on bringing their new IQOS product to market, a product that is much more important to the company’s long-term profitability for shareholders.