All of The News Stations and Commercial Talk
Radio and All of Sports TV stations Across America Can't Broadcast or
Show any Marlboro or Tobacco Products.... They are band from Advertising Marlboro... However this does
not include the Patcnews ~ The Patriot Conservative News Tea Party
Network; We can can This because I'm not under contact with the Gov. however
all the News Networks stations who supports obama can't air or show
Marlboro or Tobacco Products....
you can read More about this Report on Thw Wall Street The Wall Street Journal - http://www.wsj.org
Why Marlboro Maker Bet on Juul, the Vaping Upstart Aiming to Kill Cigarettes
Tobacco-giant Altria says its $12.8 billion investment in the
hot e-cigarette company will give it a piece of the fast-growing segment
of the market. FDA scrutiny poses risks.
By
Jennifer Maloney and
Dana Mattioli
RICHMOND, Va.—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. 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.
Altria CEO Howard Willard.
Photo:
Jason Andrew for The Wall Street Journal
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.
Tobacco's New Landscape
E-cigarette sales are booming, while cigarette sales are shrinking, and Juul is the biggest player.
Note: Sales from retail stores tracked by Nielsen for the 52-week period ended on each date; web sales not included. Volume growth for four-week period.
Sources: Wells Fargo analysis of Nielsen data
Mr. Willard wooed Juul
for more than a year. Altria first tried to buy the entire company in
late 2017 or early 2018 with an informal offer of as much as $8 billion,
according to people familiar with the matter. That approach, previously
unreported, was rebuffed. Mr. Willard eventually sweetened the offer
and settled for a minority stake. He also agreed to put Juul coupons on
packs of Marlboros, giving his own consumers an incentive to try Juul. The longtime Altria insider, who took over as CEO in May 2018,
said he did it because the future is coming faster than he or his
colleagues expected. “I’ve never believed this before: 10 years from now the
majority of the tobacco products that are sold could very well be
noncombustible products,” said Mr. Willard, his 6-foot-6-inch frame
folded into a white leather chair at Altria’s headquarters. That would mark a major consumer shift. U.S. sales of
cigarettes, cigars and smoking tobacco were nearly $107 billion last
year, compared with about $15 billion in sales of smokeless tobacco and
vaping products, according to Euromonitor International estimates, which
include web sales. Vaping products made up $5.6 billion of those sales. Although fewer and fewer Americans smoke each year, Altria has squeezed growing profits
out of a market it has dominated for decades. Price increases have
offset lower volumes, and the Marlboro brand has kept its grip on a U.S.
market that for years has been shrinking 3% or 4% a year.
A Juul e-cigarette being recharged in a USB port.
Photo:
Gabby Jones/Bloomberg News
In 2017, three events stepped up pressure on the market leader. In January, British American Tobacco PLC struck a $49.4 billion deal to take control of Reynolds American, which sells Camel and Newports. In July, the FDA announced a regulatory overhaul that
threatened to turn the tobacco industry upside down. Dr. Gottlieb said
that he would seek to reduce nicotine levels in all cigarettes so they would no longer be addictive
and ban menthol cigarettes, moves expected to take years. At the same
time, he said he wanted to help manufacturers bring to market less
harmful products such as e-cigarettes, which heat a nicotine-laced
liquid to deliver a vapor instead of burning tobacco, thereby avoiding
many of the compounds in cigarette smoke known to cause cancer and other
diseases. Then, late in the year, Juul took off. Juul’s vaporizers used snap-in pods with added flavors such as
mango and cucumber, and looked nothing like cigarettes. The
black-and-gray rectangular device was shaped like a USB flash drive and
could be plugged into a laptop to charge. The company’s sales surged. Juul’s advertising on social media and other platforms had pitched the brand as a cool lifestyle accessory
with images of people in their 20s and 30s, which critics said made the
brand attractive to teens. Later, Juul-related posts on Instagram and
Twitter
exploded, with much of the content posted by young people using
the product. After two decades of declining teen cigarette use,
“Juuling” was suddenly a verb for a trendy activity. Altria had been trying for years to develop a successful
e-cigarette. But the company’s careful, cautious culture made it
difficult to innovate, former employees said. Formerly known as Philip Morris, Altria was once a marketing
powerhouse that blanketed American televisions, magazines and
billboards. But a landmark legal settlement in the 1990s over the
mounting public-health costs of cigarettes restricted the industry’s
marketing. In the words of one former executive, it became “a law firm
with a manufacturing arm.” Altria’s MarkTen e-cigarettes, launched nationally in 2014, had
a look, shape and feel that mimicked a traditional cigarette, based on
Altria’s belief that smokers were looking to switch to something that
felt familiar. Ultimately sales didn’t support that idea. Altria also
didn’t advertise MarkTen on social media.
Altria’s MarkTen e-cigarettes for sale in 2014. The company discontinued the brand last year shortly before investing in Juul.
Photo:
Bloomberg
As Juul sales surged, Altria doubled down on its own e-cigarette
technology. Executives prepared to expand distribution of a pod-based
vaporizer called MarkTen Elite with flavors such as Strawberry Brulee
and Hazelnut Cream, and to expand online sales of Apex by MarkTen, which
had prefilled tanks in Spiced Fruit, Piña Colada and other flavors. But by early 2018, Mr. Willard, who was then the chief
operating officer and in line to take over as CEO, was privately
concerned that Altria’s own e-cigarettes couldn’t catch Juul. While
publicly expressing confidence in the strength of the cigarette market,
he was talking to the startup. Although Juul had become a status symbol among new, teenage
vapers, the company presented itself as a disrupter of Big Tobacco,
aiming to convert adult cigarette smokers to its product. It was
initially skeptical of Altria’s intentions. Altria already knew many of its cigarette smokers were looking
for an alternative and had been working to offer them options. Before
launching MarkTen e-cigarettes, it had bought the maker of Skoal and
Copenhagen smokeless tobacco. And it was waiting for FDA approval on a
heat-not-burn tobacco device called IQOS it planned to market in
partnership with
Philip Morris International. Many e-cigarettes didn’t deliver enough nicotine to satisfy the
cravings of smokers. Juul had a stronger kick. By May 2018, Juul had
captured 64% of e-cigarette sales in stores tracked by Nielsen,
according to
Wells Fargo.
Using a Juul e-cigarette.
Photo:
Gabby Jones/Bloomberg News
Speaking to staff for the first time as their CEO that month, Mr.
Willard warned that Altria was facing a rapidly changing landscape. They
would have to be more agile, he told the crowd gathered in an
auditorium at a cigarette manufacturing facility in Richmond. And they
would have to take a more blunt assessment of their weaknesses,
particularly in e-cigarettes. MarkTen was now a distant third behind
Juul and BAT’s Vuse. Any new product would have to go through a
yearslong approval process, since the FDA in 2016 had issued rules for
new products entering the market. By the fall, Mr. Willard was privately making plans to scrap Altria’s own e-cigarette efforts. “It was an emotional decision for us because we had put our
best people to work on the e-vapor organic effort,” the Altria CEO said,
in the interview. “It just so happened that in the end, Juul came up
with a more compelling product.” Mr. Willard was an ardent suitor. He had never smoked until
2015 when he took the No. 2 job at Altria and became an occasional user
of its products. In negotiations with Juul, he brandished a Juul
vaporizer and once in a while took puffs. He courted Juul’s investors
and Juul CEO Kevin Burns with pledges to help convert smokers. “I was
surprised how quickly Howard got there and said he was committed to our
mission,” Mr. Burns said in an interview.
Executive Milestones
1992 Howard Willard joins company.
1993 On “Marlboro Friday,” price slashed 20% to fight discount brands.
1994 Media reveal industry’s manipulation of nicotine content.
1998 Landmark settlement with 46 states over public-health costs of cigarettes; restrictions added on marketing.
2000 Philip Morris supports federal oversight.
2002 Miller beer brand sold.
2003 Name changed to Altria Group.
2007 Altria spins off majority stake in Kraft Foods.
2008 Agrees to acquire Copenhagen and Skoal smokeless tobacco brands for $10.4 billion; spins off Philip Morris International.
2009 FDA gains regulatory control over tobacco; taxes increase.
2014 MarkTen e-cigarettes launched nationally. Competitors Reynolds American and Lorillard announce merger.
2015 Juul e-cigarettes launched.
2017 British American Tobacco acquires Reynolds American; FDA signals regulatory overhaul.
2018 Willard becomes CEO; Altria invests $12.8 billion in Juul.
Still, Juul couldn’t be swayed: It wouldn’t sell a majority stake. Juul told Altria that another tobacco company had approached
the startup. The company was BAT, Altria’s biggest rival, according to
people familiar with the discussions. Juul’s negotiators also told
Altria the startup was analyzing a potential initial public offering
that would value the company north of $30 billion, according to other
people familiar with the discussions. Mr. Willard went to his board members to talk again about Juul.
Now, his plan was bigger and riskier. He wanted to buy a minority stake
at a valuation above $30 billion. The Altria boss said he faced tough
questions from them. How could he justify such a rich price? And how
would a minority stake in a competing product help Altria? He argued that U.S. cigarette volumes would continue to decline
at a faster clip, while e-cigarette volumes would increase 15% to 20% a
year. Altria expected Juul’s international revenue to equal its
domestic revenue by 2023. Juul’s overseas sales wouldn’t compete with
Altria, which has sold only in the U.S. since 2008, after splitting off
its international business, Philip Morris International. Altria could see a return on its investment through a potential IPO of the startup or through a share of Juul’s profits.
Mr. Willard believed that Juul’s rapid growth wasn’t a fad but a
lasting brand that could attract smokers around the globe even as U.S.
regulators cracked down. By early November, both Altria and Juul had come under pressure
from the FDA to address the spike in teen vaping. Altria announced it
was pulling some of its flavored e-cigarettes from the market. Juul said it would limit its bricks-and-mortar sales to tobacco, mint and menthol flavors, although other flavors remain for sale on its website, which has age-verification controls. At the 11th hour in negotiations, Juul made a big demand,
according to people familiar with the matter. It wanted access to
Altria’s consumer mailing list—a direct line to Altria’s consumers that a
company would normally protect from rivals. Altria agreed to send out
communications on Juul’s behalf. Altria, for its part, secured an agreement that largely prevents Juul from entering partnerships with other tobacco players.
Strategic Rethink
Sales of the cigarette brands owned by Altria have been declining for decades...
Altria's U.S. cigarette shipments
250 billion units
200 150 100 50 0 ’15 ’10 ’05 000 ’95 ’991
...but the company has improved revenue through price increases.
Altria's U.S. cigarette revenue
billion
$25 20 15 10 5 0 ’10 ’05 000 ’95 ’15 ’991
Shares fell on news of Altria's investment in Juul.
Altria stock-price performance
$70 65 60 55 50
Nov. 28
Talks with Juul first reported
45 40 019 018
Sources: SEC filings (shipments, revenue); SIX (share price)
In early December,
Altria announced it was shutting down its e-cigarette business
altogether. Two weeks later, it signed a deal with Juul valuing the
three-year-old brand at $38 billion. Some Altria employees were angry they were facing job cuts.
About 900 jobs, or 10% of Altria’s total workforce, have been
eliminated, while the Juul investment has made some of the startup’s employees millionaires overnight. “Large-scale organizational change is hard,” Mr. Willard said.
“For a long time, we had a pretty stable business, and we had a somewhat
risk-averse culture.” The company needs to leave some of that behind
and be more innovative, he said. Reaction to Altria’s pivot has been mixed. Some industry
observers called it a brilliant move. Others such as Morgan Stanley
analyst Pamela Kaufman said that cigarette price increases could
accelerate Juul’s cannibalization rate, and that Altria’s share of
Juul’s profits is unlikely to offset the lost profitability on a pack of
cigarettes. Altria’s shares have partially rebounded this year as the
company’s chief has explained in more detail the rationale behind the
deal. He also has said rival BAT brands such as Newport and Camel have
more to lose in the U.S. than Marlboro from e-cigarettes, because they
are more popular with smokers aged 21 to 29—the cohort most interested
in switching from cigarettes. 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. Mr. Willard said Altria supports efforts to combat youth use,
and is lobbying to raise the minimum purchase age for any tobacco
product to 21 from 18. Juul has strengthened the age-verification tools
on its website and closed its
Facebook
and Instagram accounts in the U.S. The startup has said it never
targeted teens and that its marketing now features adult cigarette
smokers who have switched to Juul. Altria also said last month that it would limit its retail
support of Juul this year, expanding its distribution into no more than
20,000 additional stores. 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. Write to Jennifer Maloney at jennifer.maloney@wsj.com and Dana Mattioli at dana.mattioli@wsj.com
Appeared in the March 23, 2019, print edition as 'The Vape Invader.'
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