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.
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