The house the Marlboro Man built, Altria Group, owns the largest cigarette company in the US. Altria operates through subsidiary Philip Morris USA, which sells Marlboro -- the world's #1-selling cigarette brand. Altria controls about half of the US tobacco market. It manufactures cigarettes under the Parliament, Virginia Slims, and Basic brands, among many. Altria, however, is diversifying from solely a cigarette maker to a purveyor of cigars and pipe tobacco, through John Middleton Co., smokeless tobacco products, through UST, and wine, through UST subsidiary Ste. Michelle Wine Estates. Another subsidiary, Philip Morris Capital Corp. holds a group of finance leases. Altria also owns a 27% stake in SABMiller.
During 2011, group earnings decreased modestly on a slight dip in revenue from the prior year. Operations were bolstered by higher income from Altria's cigarettes, smokeless products, and wine businesses coupled with an increase in equity earnings from SABMiller. However, lower income from its financial services business along with heftier corporate expenses and higher interest and other debt expense offset the rise. In addition, the cigars segment's results for 2011 were reduced by promotional expenses to preserve Black & Mild's market share against a wave of imported, low-priced cigars. Smokeless products, particularly Red Seal and Husk, took a hit, too, due to lower promotional investment as demand for rival discount products rose.
The recovering economy has bolstered smokeless tobacco and wine sales, while cigarette shipments continue their steady march downward. Total cigarettes shipped by the company fell less than 10% between 2009 and 2011, with Marlboro (which accounts for more than 85% of all cigarettes shipped) down nearly 7% during that time. Shipments of other premium brands fell by roughly 20%. Concurrently, shipments of smokeless products grew almost 15%. Wine shipment volumes increased close to 20% in 2011 vs. 2009.
To maintain its profitability amid declining shipments, the company has incrementally raised the price on all of its cigarette brands -- including market leader Marlboro -- by $1.16 to $1.37 cents per pack since 2009. It also raised prices on most of its smokeless tobacco brands by about 20 to 41 cents a can. Also, Altria in 2011 initiated a cost reduction program for its tobacco and service company subsidiaries to trim cigarette-related infrastructure in light of projected cigarette volume declines.
As a premium brand, Marlboro has long been a profit driver for Philip Morris. But a decline in the brand's popularity among younger smokers (ages 18 to 25) has Altria and investors particularly worried because Marlboro accounts for more than two-thirds of Altria's operating income. In response, Altria is introducing new versions of Marlboro (some lower priced) designed to widen its appeal among younger smokers and fend off competition from less expensive brands, including Pall Mall from Reynolds American and Maverick from Lorillard.
Meanwhile, Altria operates in a haze of lawsuits, with more than 100 cases pending as of end of 2011. Altria and its Big Tobacco rivals continue to try to resolve lawsuits over smoking-related illnesses, which account for the majority of cases pending against Philip Morris and Altria. The industry has reached settlements with US states amounting to nearly $250 billion, and a number of civil suits are pending. – less