Why Marlboro Maker Bet on Juul?…

The biggest U.S. tobacco company has made a $12.8 billion bet on a company whose stated goal is to get smokers to drop cigarettes. The calculated gamble: The move will help the Marlboro maker keep up with a quickly changing market. The risk: It could hasten its own decline. Facing an accelerating fall in cigarette sales, Altria Group Inc. in December put billions into Juul Labs Inc., a controversial startup whose sleek, nicotine-packed vaporizers have fueled a surge in the e-cigarette market.

Addressing employees gathered at the company’s headquarters after the deal, CEO Howard Willard said a bold change was necessary. Smokers were switching to vaping, and Altria’s own e-cigarettes were unlikely ever to catch up to Juul. But some workers were worried the new boss was undermining the company’s core business, which churns out more than 300 million sticks a day.

DISCOVER HOW YOU CAN START MAKING UP TO $3,750 TODAY WITH JUST 7 SIMPLE CLICKS!

The investment for a 35% stake in Juul—plus a $1.8 billion bet on a Canadian marijuana grower the same month—upended a century-old company known for its steady share price and reliable, generous dividends. Altria’s credit rating was downgraded. Investors dumped the stock. Hundreds of scientists, designers, lawyers and other staff lost their jobs in restructuring after the partnership.

The deal also intensified scrutiny of Altria by federal regulators, who blame Juul’s products for an increase in underage vaping and who have already moved to restrict their sales.

It’s the dilemma facing many established companies in mature markets. How should one respond to new entrants that are disrupting the status quo, when the classic strategy—buy the disrupter—could potentially speed the decline of the legacy business? PepsiCo Inc. and Coca-Cola Co. have shifted away from sugary sodas by scooping up coconut water, coffee and kombucha.

Big media companies such as Walt Disney Co. and AT&T Inc. are launching their own streaming services as they chase consumers who are cutting the cord. Walmart Inc. has invested billions in e-commerce sites such as Jet.com and India’s Flipkart as the retail giant works to fend off Amazon.com Inc.

Mr. Willard, 55 years old, said the leap into fast-growing Juul is the surest way to preserve the profits the company generates today by making 5 out of every 10 cigarettes sold in the U.S. “At a time when e-vapor is going to grow rapidly and likely cannibalize the consumers we have in our core business, if you don’t invest in the new areas you potentially put your ability to deliver that financial result at risk,” he said in an interview.

By Altria’s count, there are already 12 million adult vapers in the U.S., and the number is growing quickly. Many of those are cigarette smokers looking for a less harmful way to get their nicotine fix. Other vapers are children and teenagers who have never smoked before, and who acquire the devices even though sales are legally restricted to adults at least 18 years old. Youth use of e-cigarettes jumped 78% between 2017 and 2018—to one out of every five high-school students—thanks largely to the popularity of Juul.

The FDA this month announced new restrictions on retail sales of e-cigarettes in the fruity and sweet flavors the agency said appeal to youngsters. If underage use continues to increase, the agency could institute an outright ban on devices such as Juul’s, said Scott Gottlieb, the outgoing Food and Drug Administration chief. Juul projects its 2019 global sales at $3.4 billion. One big unknown is how the FDA will regulate vaping. Convenience stores and gas stations will effectively be banned from selling most flavored e-cigarettes under the restrictions announced earlier this month.

“Now that Altria and Juul are controlling the leading pod-based flavored product that seems to be the most favored product among kids, they’re going to be a key to trying to address this crisis,” Dr. Gottlieb said in an interview. The FDA boss said he plans to depart the agency, leaving in question the fate of the broader regulatory overhaul he had proposed for the tobacco industry.

START TRADING NOW OR TRY A FREE DEMO ACCOUNT

One sales point that hasn’t changed: the convenience store for Altria employees inside its Richmond research center. It sells bottled water, snacks and Marlboro cigarettes. It doesn’t have plans to add Juul.



Categories: Altria Group Inc

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: