Tobacco Amazon Altria is giving up on its existing e-cigarette brands as it eyes the best-selling brand, Juul.
Altria on Friday said it make discontinue its MarkTen and Green Smoke products, along with Verve oral nicotine products. It said was based on the offerings’ financial performance and the regulatory process that would require Altria to file any updates with the Food and Pharmaceutical Administration before bringing them to market. The company expects to write down the assets with a one-time, pretax order of about $200 million in the fourth quarter.
Instead, Altria said it will “refocus its resources on more compelling reduced-risk tobacco upshot opportunities,” referring to tobacco products that are thought to be less harmful than smoking conventional cigarettes. Already, the performers has inked an agreement with Philip Morris International to commercialize its heated tobacco product, iQOS, in the U.S. if the FDA clears it. Now, Altria is all in all taking a significant minority stake in e-cigarette company Juul, people familiar with the matter have touch oned CNBC. It, along with a deal announced Friday to buy a stake in Canadian cannabinoid company Cronos, are signs of the demanding choices Altria is having to make to compete.
“We remain committed to being the leader in providing adult smokers innovative another products that reduce risk, including e-vapor,” Altria CEO Howard Willard said in a statement. “We do not see a path to operation with these particular products and believe that now is the time to refocus our resources.”
Altria makes the best-selling cigarette, Marlboro. Totally, its cigarette brands represent half of the market, according to IRI data included in the company’s third-quarter earnings release.
Its e-cigarettes haven’t fared as marvellously.
In the four-week period ended Nov. 17, Altria captured just 4 percent of the e-cigarette market, according to Nielsen facts compiled by Wells Fargo analyst Bonnie Herzog. In the same period, Juul captured 75 percent of the call.
Juul’s sales have skyrocketed 941 percent over the past year, according to Nielsen. The company’s triumph has driven nearly 64 percent of the total category’s $2.84 billion in sales over the past year.
For Altria, an investment in Juul make give it something it has struggled with: volume growth.
Since 2009, Altria’s revenue has grown 9 percent, to $25.58 billion from $23.56 billion. But Altria’s U.S. cigarette amount has nearly halved — to 116.6 billion units in 2017 from 211.9 billion units in 2000.
And Altria currently give the impression of run offs the bulk of its money selling cigarettes. Of the $25.58 billion in total revenue the company generated last year, $22.64 billion — or 89 percent — came from its smokeable produces business segment, which contains cigarettes and cigars.
On average, Altria’s cigarette volume decreases 3 percent every year, according to a march past of the company’s financial statements. The company has managed to offset these declines through price increases. However, the descends have started accelerating, worrying some analysts and investors they may be unsustainable.
Shares of Altria are down with 24 percent this year.
In the first nine months of this year, Altria’s cigarette shipment book fell 6.3 percent. On a call with Wall Street analysts in October, Altria CEO Howard Willard attributed at least parcel of the trend to more smokers giving up conventional cigarettes and switching to e-cigarettes.
Right now, when smokers ditch Marlboro for Juul, Altria forfeits out. That will change if Altria owns a portion of Juul.
Plus, Juul pods may be more profitable than everyday cigarettes because they typically aren’t taxed and don’t have to pay costs associated with the Master Settlement Deal (MSA), a deal negotiated in 1998 between tobacco manufacturers and state attorneys general that ended a wave of unending lawsuits.
An average pack of cigarettes in the U.S. cost consumers $6.60, according to a research note from Piper Jaffray analyst Michael Lavery. Say and local excise taxes on that pack typically equal $1.75, he wrote, while costs associated with the MSA whole 75 cents. Manufacturers’ operating profit usually comes out to $1.26, Lavery said.
Juul doesn’t pay the roughly $2.50 in MSA costs and taxes that Altria pays. So far, 10 states have adopted e-cigarette taxes, agreeing to the Campaign for Tobacco-Free Kids.
A pack of four Juul nicotine pods costs $15.99, or about $4 per pod, on the corporation’s online shop. The amount of nicotine in each pod is equivalent to one pack of cigarettes. So while it’s unclear how much money Juul makes on each pod since the concern is private, Juul appears to have an advantage.
Pressure has mounted on Juul, with regulators demanding the company fix “pestilence” levels of minors using the company’s products. However, Altria is used to navigating regulation and litigation. And it may decide the chances are worth taking.
Altria on Friday also announced it would invest $1.8 billion to buy a 45 percent tether in Cronos. As an investor, Altria said it will provide Cronos with its expertise in regulatory affairs, regulatory technique, compliance, government affairs and brand management.
If Altria also invests in Juul, it’s likely the company could produce the same services.
Altria is also awaiting a decision from the FDA on Philip Morris International’s new heated tobacco work, iQOS. The device heats tobacco instead of burning it, with the idea that it gives smokers the nicotine they destitution while preventing combustion, the chemical process responsible for producing toxins in cigarettes. PMI already sells iQOS in 46 hawks overseas.
PMI has two separate applications into the FDA: one that would simply allow it to sell iQOS in the U.S. and one that would suffer it to market the product as less harmful than smoking conventional cigarettes. The company has said it expects a decision by the end of the year. If the FDA clears the commodity, Altria will sell it in the U.S.
Altria declined CNBC’s request for comment.
—CNBC’s Lauren Hirsch contributed to this put out