As many readers will know, I am a great aficionado of tobacco stocks and believe they have the single best business model of all-time. They sell an addictive product to loyal customers who literally cannot stop buying their product. Tobacco companies can raise prices every year with little effect on sales (adjusting for the structural decline of the business). And best of all, they pay out large and ever growing dividends to their shareholders. Owning Tobacco Stocks + dividend reinvesting = Long Term Wealth.
Possible Concern of E-Cigs
While traditional tobacco is a great business, new technological advancements such as ecigs have the potential to disrupt this dynamic. I worry that Altria (my largest shareholding) is not doing enough to keep up with the times and may fall behind. So I wrote a letter to Altria to give them a few ideas.
THE LETTER
1. Rethink the company's purpose and strategic vision
Instead of
Altria as simply a tobacco company, let's try Altria as a world leader in
providing nicotine delivery devices to US adults. The emphasis is on providing
US adults a wide range of nicotine delivery options ranging from traditional
tobacco products such as cigarettes, cigars, and smokeless moist snuff to newer
products like ecigs. With this change in vision, Altria will be able to
research and develop new forms of delivering nicotine to adult consumers such
as nasal snuff (convenient 4mg pellets that look like inhalers see
http://www.snuff.co.in/english_snuff.html#european_snuff for details ) or
nicotine infused beverages.
2. Improve and Expand Social Media Presence
While
traditional tobacco cannot be marketed through social media channels such as
Facebook or Twitter, new ecigs can use social media. Lorillard has an active
and very engaging Twitter page with 13K followers. Here all followers certify
they are at least 18yrs old to join. This allows Lorillard a powerful marketing
tool to directly engage with its valuable customers. As a result, Lorillard's
Blu ecigs have over 13K followers and growing. Altria has so far been unable to
establish a foothold in to social media. The current number of followers on
Altria's Twitter page is 1759. This is a direct result of an inactive corporate
account which only recites company press releases. This lack of a social media
presence will hurt Altria's eventual roll out of MarkTen ecigs. The new
generations of adults 18-21 spend more time on social media sites than
traditional avenues available to advertisers like TV, radio, etc.
3. Embrace Ecigs as a way to grow the adult
market for nicotine.
A
traditional way to think of ecigs is to assume that it will cannibalize
cigarette sales. While this will certainly occur, it does not have to be a net
negative for Altria overall. With the proper marketing I believe that ecigs and
other smokeless products could actually grow the US nicotine market (estimated
at 44-46 million smokers). This is a potentially game changing technology that
could increase the number of people who use nicotine and arrest the long-term
decline in the tobacco industry. In 1965 40% of adults smoked cigarettes
compared to 20.8% today. The only reason for the decline is due to health risks
associated with smoking. If you can present to US adults a proposition which
allows them to consume nicotine while not having to worry about the established
health risks of smoking, than it is a win-win. Ecigs are able to reach out to
new consumers who would normally never smoke cigarettes because of the negative
health effects.
4. Special Marketing for E-Cigarettes
Unlike
traditional tobacco products, Ecigs are not currently regulated by the US
government or FDA. This has presented early entrants like Lorillard with the
opportunity to market ecigs differently than most tobacco products. With the
lack of regulatory guidance is opportunity. Lorillard sells its Blu ecigs
directly online with a well-constructed website along with traditional retail
channels. The website makes use of celebrity endorsements from well-known
people such as Jenny McCarthy and online persona's such as "Bob" aka
Mr. cool. Furthermore, Blu has a rewards program for purchasing ecigs and refill
cartridges to encourage brand loyalty. Altria, meanwhile, has not managed to
get a web store up and running for MarkTen yet. In fact, the Nu Mark website
only contains general information about MarkTen. Altria needs to take advantage
of the current regulatory uncertainty and actively market MarkTen similar to
Lorillard. Simple convenience store displays are not going to enough. Your
competitors are already utilizing TV ads to promote their products. They are
trying to lock in as much market share of the ecig market as possible before
regulatory restrictions ban the practice. One way Altria could roll out MarkTen
would be to product launch on social media like Twitter and Facebook along with
more traditional events. Give away some MarkTen's to age verified consumers and
encourage them to review it and share with their friends. Best advertising is
word of mouth especially when it comes to new technology.
I will leave
you with a story which shows the potential for Ecigs. I was in a DMV last month
(always a fun experience), and a man next to me started smoking an ecig. Four
people came up to him to inquiry what this new device was and whether he was
smoking? He said no, it was all water vapor. People were amazed and enthralled with
this new technology, and more importantly, no one asked him to stop or move
outside! Social stigma of smoking gone!
BLACK SWAN INSIGHTS
