Major Changes in the US Tobacco Market

Introduction: The vast majority of cigarette production and sales in the United States has long been controlled by three major tobacco companies. Philip Morris USA, a subsidiary of Altria Group, is the manufacturer of brands such as Marlboro and Basic. According to data from the Centers for Disease Control and Prevention, in 2013, Philip Morris USA held a 46.1% share of the U.S. tobacco market, with annual sales of 135.1 billion cigarettes. The other two competitors are Reynolds American and Lorillard (the two companies recently announced a merger). Reynolds American sells cigarette brands such as Camel, Winston, and Kool, with a market share of 24.9% and sales of 72.9 billion cigarettes in 2013. Lorillard's brands include Newport, Maverick, and Kent, with a market share of 13.7% and sales of 40 billion cigarettes in 2013. Other companies collectively hold a 15.3% market share, with sales of 45 billion cigarettes.

In recent years, the sales of menthol cigarettes in the U.S. market have seen significant growth. A report from the Federal Trade Commission in 2011 indicated that menthol cigarettes accounted for 32% of the U.S. tobacco market that year. Newport, a brand under Lorillard, is a menthol cigarette that holds a 37% share of the U.S. menthol cigarette market, accounting for 12.5% of the total U.S. cigarette market.

If the U.S. Food and Drug Administration sets strict control conditions, the market outlook for menthol cigarettes in the U.S. is not very clear. According to Citigroup analyst Vivian Azer, companies with a high proportion of menthol cigarette sales will face difficulties.

According to news from Chinese electronic cigarette sources, in recent years, tobacco production in the U.S. has continued to decline. Data from the Tobacco Merchants Association (TMA) shows that U.S. tobacco consumption fell from 415 billion cigarettes in 2002 to 274 billion cigarettes in 2013. However, overall, the U.S. tobacco industry remains profitable.

For a long time, the vast majority of cigarette production and sales in the United States has been controlled by three major tobacco companies. Philip Morris USA, a subsidiary of Altria Group, is the manufacturer of brands such as Marlboro and Basic. According to data from the Centers for Disease Control and Prevention, in 2013, Philip Morris USA held a 46.1% share of the U.S. tobacco market, with annual sales of 135.1 billion cigarettes. The other two competitors are Reynolds American and Lorillard (the two companies recently announced a merger). Reynolds American sells cigarette brands such as Camel, Winston, and Kool, with a market share of 24.9% and sales of 72.9 billion cigarettes in 2013. Lorillard's brands include Newport, Maverick, and Kent, with a market share of 13.7% and sales of 40 billion cigarettes in 2013. Other companies collectively hold a 15.3% market share, with sales of 45 billion cigarettes.

In recent years, the sales of menthol cigarettes in the U.S. market have seen significant growth. A report from the Federal Trade Commission in 2011 indicated that menthol cigarettes accounted for 32% of the U.S. tobacco market that year. Newport, a brand under Lorillard, is a menthol cigarette that holds a 37% share of the U.S. menthol cigarette market, accounting for 12.5% of the total U.S. cigarette market.

If the U.S. Food and Drug Administration sets strict control conditions, the market outlook for menthol cigarettes in the U.S. is not very clear. According to Citigroup analyst Vivian Azer, companies with a high proportion of menthol cigarette sales will face difficulties.

In contrast, Altria Group is less affected by regulations related to menthol cigarettes. However, if the U.S. Food and Drug Administration implements controls, it can only watch its profits decline helplessly. Altria Group's annual report shows that menthol cigarettes account for 20% of its total cigarette sales.

Investment Interest

Investing in tobacco stocks has started to become profitable, and this trend is expected to continue. In fact, some analysis shows that compared to other stocks, tobacco stocks can provide shareholders with higher returns. The U.S. tobacco market offers relatively high dividends, attracting many investors.

Stifel Financial states that the U.S. tobacco industry is developing well: prices and sales are reasonable, costs are controlled, and profits continue to rise. Reports from the U.S. Securities and Exchange Commission show that Lorillard's dividend yield is 4.1%, while Reynolds American and Altria Group's dividend yields are 4.4% and 4.7%, significantly higher than those of other companies.

Sound management helps attract investors. "Philip Morris USA achieves revenue growth by balancing different income mechanisms, including price and cost management, retail equity performance development, capital construction activities, and product innovation," said Martin Barrington, Chairman and CEO of Altria Group, at a consumer analysis conference in New York. "Although overall tobacco sales are declining, Philip Morris USA has successfully stabilized its revenue through these methods. Over time, each pricing balance method will exert its maximum effectiveness, as Philip Morris USA pursues long-term goals."#p#分页标题#e#

TMA Vice Chairman Daryl Jason stated that in recent years, the U.S. tobacco market has been responding to declining consumption by raising prices to maintain net income. Since 2010, Altria Group has raised prices eight times. In May, they increased the price of a pack of 20 cigarettes by $0.06, bringing the price to $4.52. In contrast, in April 2002, a pack of 20 cigarettes only cost $2.76.

Stifel Financial analyzes that price increases indicate that the tobacco market is still in a good competitive environment. Tobacco companies hope to exchange reduced sales of discount brands for increased sales of premium brands to gain more profits.

Barrington stated that price is a significant driver for Altria Group. "The brand equity of Marlboro can support its retail price. Philip Morris USA carefully manages its pricing mechanism to achieve long-term profit growth," he said. "Whenever making pricing decisions, the company considers various factors, including the economic impact on consumers, price gaps, competitive dynamics, and more."

Electronic Cigarette Market

TMA predicts that by 2017, U.S. cigarette consumption will decline to between 205 billion and 243 billion cigarettes. Bonnie Herzog, Managing Director and Tobacco Data Analyst at Wells Fargo, predicts that by 2023, U.S. tobacco consumption will drop to 84 billion cigarettes.

The continuous growth of electronic cigarette sales has contributed to the decline in U.S. cigarette sales. According to TMA's predictions, by 2020, electronic cigarettes will account for 10% of total tobacco sales.

TMA also estimates that this year, U.S. electronic cigarette market sales will reach $2.6 billion, potentially rising to $6 billion by 2017. Most analysts agree with TMA's view that cigarette sales face severe challenges from the emerging electronic cigarette industry. "If the U.S. Food and Drug Administration's rules do not further threaten the electronic cigarette industry, then as production technology improves, their impact on the traditional cigarette market's decline will be further strengthened," Herzog said.

Major U.S. tobacco companies are entering the electronic cigarette market through acquisitions or internal research and development. In 2013, Lorillard led the electronic cigarette market with a 47% market share.

At the same time, with Lorillard Tobacco Company being acquired by Reynolds American, the U.S. tobacco industry will undergo new changes. Complex negotiations and collaborations may reshape the U.S. tobacco industry chain, and with the involvement of Imperial Brands and British American Tobacco, the U.S. tobacco market will open up new patterns through mergers and acquisitions.

According to Wells Fargo, Imperial Brands intends to invest $7.1 billion to acquire Lorillard's Blu electronic cigarettes and brands such as Winston, Kool, and Salon, to gain more share of the U.S. tobacco market. Imperial Brands Chairman Alison Cooper pointed out that after the acquisition, Imperial Brands will rise from fifth to third place in the U.S. market, with market share increasing from 4% to 10%.

"This will lead to greater competition, especially in the electronic cigarette sector," Herzog said. Altria Group is also pushing its MarkTen electronic cigarette nationwide to respond to market competition.

The development of electronic cigarettes will largely depend on regulation. In April, the U.S. Food and Drug Administration established relevant rules to regulate electronic cigarettes like traditional cigarettes. The FDA also launched a 60-day initiative inviting manufacturers, retailers, public health experts, and other members of society to provide suggestions for developing appropriate regulations. Later, it announced that the deadline for the initiative was postponed from the initial July 9 to August 8.

Philip Gorham, an analyst at Morningstar, said: "The electronic cigarette market is still in its early development stage, and potential policy changes from the U.S. Food and Drug Administration make it difficult to predict how it will develop in the future." Large companies may be more agile than small ones because they have more extensive resources, good relationships with traders, and are quicker and more efficient in implementing and responding to FDA regulatory policies.