Altria Doubles Down on Vice With Vaping and Marijuana Bets


(Bloomberg) -- Altria Group Inc. is betting that marijuana and vaping might be the cure for decades of declining tobacco use.

Selling cigarettes put Altria in a difficult position for years. The Marlboro maker had to warn its own customers not to use its products, while promising not to try and attract new ones when those who heeded the warnings quit. Now, with stakes in two buzzed-about companies, Altria is getting back into territory that might reawaken some of the questions it faced during the height of its tobacco dominance.

On Thursday Altria said it would take a $12.8 billion stake in Juul Labs Inc., touting the ability of the popular vaping devices to help smokers quit. And earlier this month it got into the marijuana business, announcing on Dec. 7 that it would take a $1.8 billion stake in Canada’s Cronos.

Neither investment is without peril. While marijuana is moving slowly along a path toward widespread legalization in the U.S., it remains illegal at the federal level. The Juul devices have also proven to be wildly popular with a new generation of nicotine users -- teens and young people. Juul has said it isn’t targeting young, new users, and has agreed to restrict some sales of the devices.

“Juul has clearly been a game-changer in the nicotine category,” Cowen & Co. analyst Vivien Azer said in a note to clients.

It could use one. In 1998, a settlement among the U.S. and four largest cigarette makers forced the tobacco manufacturers to pay billions of dollars and cease some marketing. It was the end of the rugged Marlboro Man, who had been used to market cigarettes since the 1950s. By 2000, the U.S.’s largest public pension fund had decided to sell tobacco stocks, saying an “unprecedented amount of legal, regulatory and legislative action in the industry could substantially reduce our shareholder value in tobacco.”

In 2003, Philip Morris rechristened itself as Altria Group, and began to shuck its past. It had bought a huge stake in Kraft Foods and was trying to refashion itself as a purveyor of healthy and wholesome food for families.

Steven Pinker, a Harvard professor of linguistics, said that the new name, which suggested the word “altruism,” was an “egregious” example of a new corporate name created to invoke lofty ideals. Altria said in 2003 that the name change was meant to evoke innovation, passion for success, and “its commitment to its communities and societies.”

Five years later, the company spun out the biggest chunk of its Marlboro franchise, which had been providing 75 percent of its revenue, creating Philip Morris International.

Getting into vaping and pot isn’t without risk. Moody’s Investors Service revised its outlook on Altria’s debt to negative from stable following the Juul deal, citing “concerns with the regulatory risks associated with the evolving e-cigarette and cannabis markets.” It also saw the cannabis deal as “credit negative” given “pricing and regulatory dynamics around legal marijuana sales are still developing, and potential liabilities or litigation could arise in the future.”

On a conference call Thursday after the Juul stake was announced, Altria executives said they weren’t aware of how many of Juul’s smokers are youths -- and that if it can’t avoid attracting young smokers, it could kill the entire category -- even as a tool to convert adults from cigarettes.

But there’s data indicating that many vaping users are underage. The Food and Drug Administration has called youth vaping an epidemic. A survey released last week by the University of Michigan showed that one in five high school seniors had vaped nicotine in the past 30 days. The survey findings called the increase in teen vaping “the largest ever recorded in the past 43 years for any adolescent substance use outcome in the U.S.”

Altria hasn’t just doubled down on vice. It has also hedged its bets with IQOS, a “heat not burn” tobacco product being developed by Philip Morris that could offer some of the taste of cigarettes with fewer risks. Altria has an agreement to market the product in the U.S. -- if it gets approved by the FDA.

Philip Morris International has submitted reams of information on toxicology and health to the FDA so it might be able to make risk-reduction claims to customers in the U.S. Juul will also eventually have to register its device with the FDA, though under what’s likely to be a less-rigorous path than IQOS has chosen.

Philip Morris International Chief Financial Officer Martin King said Thursday that in the 40 markets where IQOS has launched, it has switched 6 million cigarette-smokers. He said that the device would be the best at converting adult smokers.

“The experience, the taste, the ritual, the satisfaction” is very close to a cigarette, King said in a phone interview.

Michael Bloomberg, the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News, supports antismoking campaigns and other health initiatives through his philanthropy.

©2018 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.