The current market challenges that Altria Group, Inc. is expected to face are concerned with changing consumer needs and demands, as well as declining tobacco consumption. This issue requires the development of an alternative strategy that will open new opportunities for the company. Nevertheless, Altria has been known for creating outstanding value for its shareholders, with the company boosting dividends for forty-six years consecutively (Trefis Team, 2016). Between 2010 and 2015, Altria had adjusted diluted earnings per share growth at a compound annual rate of approximately 8.1% with total shareholder returns amounting to 204%, which is more than double the return of the S&P 500 Index (Trefis Team, 2016).
The tobacco operating companies included in their umbrella have had the leading positions in the US’s most profitable categories, including cigarettes, smoking tobacco, and machine-made cigars. The highest performance is observed in such premium brands as Marlboro, Skoal, Copenhagen, and Black & Mild. The current strategy implemented by Altria is concerned with a three-way system aimed at delivering sustained growth to critical shareholders.
The first area on which Altria has been focusing is associated with the maximization of income from its main premium tobacco businesses. The company is the largest in the US within the tobacco industry, capturing over half of the country’s retail cigarette market share. At the same time, maximizing the income of the company, it maintains modest share momentum overtime on Marlboro. Furthermore, John Middleton, which is a part of Altria, produces large machine-made cigars and pipe tobacco, with the core product Black & Mild driving the significant share gains in the cigar category (Trefis Team, 2016).
The second strategic area for Altria is concerned with growing new streams of income with innovative smoking products. For example, the smokeless tobacco segment has been used as one of the core segments to facilitate increased earnings. The company is making regular attempts to drive volume growth in such a segment while also trying to gain a retail share in such core brands as Skoal and Copenhagen. A new operating company for Altria, Nu-Mark, has been focusing on the responsible development and marketing of innovative tobacco products, with an emphasis placed on succeeding in the US electronic vapor category.
The third core strategic area is concerned with the management of diverse income streams for delivering consistent financial performance to the company. Specifically, although Altria’s primary revenue comes from its tobacco-related products, it also has a highly profitable wine segment. For instance, Ste. Michelle Wine Estates has developed a strong presence in the market of premium wine brands, with a 13% compounded annual growth between 2010 and 2015 (Trefis Team, 2016).
In addition, an approximately 27% economic interest in SABMiller offers the company to engage in about 36% billion global profit pool (Trefis Team, 2016). In the wine segment, the expansion opportunities are vast, thus enabling further considerations for the strategic direction regarding Altria’s different companies and brands.
Taking into account the three-way strategy that Altria implements, it is essential to point out the strategic challenges that the company is currently facing. The main strategic burden is associated with declining cigarette consumption rates, which has been limiting the performance of Altria’s major tobacco players. Together with other tobacco industry majors, the company has been hit by a new FDA proposal to significantly lower cigarettes’ nicotine content (FDA, 2018). The new regulatory step was supposed to “advance a comprehensive policy framework that FDA believed could help avoid millions of tobacco-related deaths across the country” (FDA, 2018, para. 1). This measure, along with the FDA’s additional norms to display transparent information about the health implications of smoking, has been weighing on the tobacco segment.
In addition, in the attempts to adhere to the already existing regulatory policies, tobacco manufacturers are obligated to obtain marketing authorization when bringing any new tobacco product to the market. Besides, both the European Union and the FDA have been proposing a ban on menthol based on the Tobacco Control Act, per which menthol cigarettes have an adverse influence on public health. Considering the mentioned challenges, Altria, as well as other companies such as Vector Group and British American Tobacco, are all limited in their strategic directions when it comes to cigarette products.
Alternative Strategy Generation
With limited hopes of attaining significant growth in the cigarette segment, it is recommended that Altria focuses on other product segments, such as reduced risk smoking products (RRPs), otherwise referred to as products with the potential to reduce the risks associated with smoking. Harnessing the expansive potential of RRPs for Altria is associated with the alignment of three important forces.
First, the company should identify which alternatives to the traditional products the consumers are seeking. Second, the organization should invest in significant Research and Development (R&D) efforts to create radically new and innovative technologies. Third, Altria is expected to follow the regulations established by the local and international governments that define the rules of not only production but also marketing and realization of smoking products.
The recommended alternative strategy goes hand-in-hand with the concept of a long-term perspective on business, which has shown to be essential for the ongoing success of companies. According to Barton et al. (2017), organizations that are classified as long-term tend to outperform their short-term industry peers on a range of crucial economic and financial metrics, such as earnings, revenues, and market capitalization.
Therefore, the direction that Altria is recommended to take should be dictated by the forecasted market needs and customer expectations, including the vast range of tobacco experiences demanded by each diverse demographic globally. While the conventional products offered by the company will remain a part of its operations because they provide consumers with an essential option for years to come, the uptake in the latest vapor products is necessary for long-term strategic maintenance.
As suggested by Barton et al. (2017), between 2001 and 2014, the revenue of firms that pursue a long-term strategy cumulatively grew by approximately 47% and with a lower level of volatility. Besides, long-term firms tend to invest more than other companies, especially in terms of R&D efforts, with the spending increasing year after year concerning technological advancement expenditure (Barton et al., 2017). Since it is recommended to focus on the R&D for the latest smoking products, the long-term orientation of the business points to the possibility to capitalize on growth and expansion.
RRPs also represent the potential sources of expansion not only due to the increased consumer demand but also due to the positive role played by regulatory bodies. The general consensus is that the regulators dealing with the definition of standards for Reduced-Risk Products will recognize the distinct potential that such products provide. It is essential that the company initiates an open and transparent dialogue with regulatory bodies to develop frameworks that would allow RRPs to thrive and meet the needs of consumers, public health organizations, governments, and industries.
The strategy of openness encourages both collaboration and innovation. There is a need for regulatory authorities, public health institutions, and the scientific community to work together to create the most appropriate frameworks that will allow RRPs to reach their full potential.
Another alternative strategy is concerned with diversifying the product range beyond nicotine products. Considering the excellent manufacturing and R&D potential of Altria, there is a possibility to explore the market of cannabidiol (CBD) and cannabis-related products. In the United States, the legality of cannabis use is expanding, including recreational use, medical use, as well as medical use under the conditions of limited tetrahydrocannabinol (THC) content.
Overall, the medical use of marijuana is legalized in thirty-five states, with a doctor’s recommendation. Thirteen more states have established laws that guide the limitation of THC in cannabis products to allow access to CBD-rich products while avoiding the psychoactive component of the plant (Mead, 2019). In fifteen states, as well as the District of Columbia, Guam, and the Northern Mariana Islands, the recreational use of cannabis has been legalized. In sixteen more states and the US Virgin Islands, it has been decriminalized (Mead, 2019).
Therefore, Altria should consider an alternative to investing in R&D efforts associated with CBD products, the demand for which is increasing. Considering the current trends, the global CBD market, valued at US $4.6 billion in 2018, is expected to increase at a compound growth rate of 22.2% between 2019 and 2015 every year, which makes the industry a potential area for Altria’s expansion.
The demand for CBD use for wellness and medical purposes is rising due to the healing properties of the product, which is an essential factor for the company to consider. The strategic direction associated with the development and marketing of cannabinoid products also goes hand-in-hand with the growing product and adoption and utilization owing to the increased number of governmental approvals, which is an anticipated factor associated with driving the demand for CBD-infused products.
At the present time, the strategy prioritization should align with the current market trends and demands. Due to the close connection between strategy, marketing, and technologies, Altria is currently challenged with aligning the three components in order to reach maximum profitability (Brinker, 2014). The declining demand for tobacco smoking products points to the need for Altria to facilitate investment in RRPs as well as other alternatives, such as cannabinoid products. While there is no evidence for the company to eliminate the production of tobacco cigarettes and cigars, it is essential that the organization is prepared for the gradual decline in such products’ marketing, especially in light of the pandemic.
According to the report by Ioannidis and Jha (2020), the COVID-19 pandemic creates a natural experiment, in which expedient health considerations have led to decisions that have significant socioeconomic implications both for the public and private sectors. The increased potential for the heavy symptoms and burden of disease were found in smokers due to the fragility of their lungs associated with tobacco smoking (Ioannidis & Jha, 2020). In addition, tobacco use contributes to increased poverty, which is a significantly negative factor in the present climate where the population needs financial resources to stay healthy as well as recover in case of emergency situations. Even though the cases of banning cigarettes, such as in Bhutan, have been ineffective, the overall state of affairs regarding tobacco smoking may change in the future when scientists have the opportunity to study COVID cases in detail and find more information about how the ongoing use of tobacco affected the occurrence of the disease and subsequent recovery.
Even though tobacco will not be entirely banned by legislation, a realistic strategy would be for governments to set dates when the sales would be banned, including a transition period of heavily taxed sales only through prescribed shops. Considering the consensus regarding the adverse impact of the tobacco industry on the health care system, it is likely that companies selling smoking products may not come out of the global event as ‘winners’ with increasing sales (Ioannidis & Jha, 2020). As there are significant decisions and actions for health acceptable under exigency, more and more governments, and public organizations will work on eliminating the tobacco industry. Therefore, continuing to expand the production of tobacco products is not an option for Altria.
It is recommended for Altria to consider focusing on the production and marketing of CBD products in the domestic market as well as in countries where the substance is legal to use by the public. Besides, CBD has become the latest consumer trend, which is a result of the increased number of social media personas and celebrities promoting the health benefits of its use, marketing initiatives by the participants in the industry, as well as growing application areas. This has led to the increase of product options in which Altria can invest, such as personal care and cosmetics, pharmaceuticals, as well as food and beverages that contain safe amounts of CBD content (Grand View Research, 2019).
The focus on cannabinoid-related products is a potentially profitable strategic direction for Altria because the increased public awareness of CBD’s health benefits has encouraged people to buy them irrespective of their cost. Mainstream retailers ranging from CVS to Martha Stewart are embracing CBD products because they have a higher profit margin (Associated Press, 2019). Walgreens Boots Alliance, Rite Aid, and CVS Health also made the decision to sell CBD-based products at their stores. Even though there are some challenges associated with the regulation of CBD products, the focus on them is the highest-priority strategy because it involves a long-term business orientation.
Reduced-Risk Products are also a priority for Altria; however, after R&D into CBD products because the market is already concentrated with tobacco smoking alternatives. Altria has already been responding to the changing market needs by offering several reduced-risk tobacco products helping to maintain its market share. The flagship electronic vapor products such as MarkTen and Green Smoke are performing strongly in the smokeless category (Zacks, 2018). While the company will continue investing in R&D efforts associated with RRPs, the success of Juul Labs in the smokeless product industry is hard to beat. Moreover, Altria Group has already acquired 35% stake in Juul Labs in 2018, which allows the company to gain profit without the need for extensive R&D associated with the advancement of the product based on market needs (Reinberg, 2020).
The goal of the proposed alternative strategy associated with CBD product manufacturing and marketing by Altria entails a long-term vision of the brand, which is essential for ongoing success and market share maintenance. Among the other strategies, the orientation on CBD is an innovative but potentially profitable endeavor because it encourages innovation and collaboration between regulatory organizations, public health bodies, and the scientific community. Besides, on average, long-term companies tend to show more robust financial performance over time, with the market capitalization growing “US $7 billion more compared to other firms between 2001 and 2014” (Barton et al., 2017, para. 5).
Their complete shareholder return is also more significant, with a 50% higher likelihood of being in the top decile or quartile (Barton et al., 2017). Although the CBD-related strategy is challenging, it has a long-term perspective on business for Altria. In addition, North America has the largest CBD market share, which is an advantage for the company that can introduce its innovative products in a domestic market.
The goal of the proposed alternative strategy is to enter the CBD market with an innovative product range that aligns with customer demands. The objectives of the strategy are categorized into several areas. First, strategic financial objectives include exceeding $1 billion in sales in the next two years, increasing revenue by 20-30% annually, decreasing expenses by 10%, as well as increasing net profits by 20% annually. Second, the strategic customer objectives include the expansion of sales to existing customers and increasing their retention, achieving and maintaining high levels of customer service, introducing new products to both new and existing markets, and improving a service approach for customers.
The internal or operational strategic objectives include the meeting of product standards, an increase in community outreach, as well as the improvement of internal communications. Finally, the people and strategic learning objectives include employing professionals to create value for brands, develop leadership capacities, and enhance team potential, as well as align relevant cultural incentives and team rewards with their accomplishments.
The strategy of innovation is recommended for Altria when introducing CBD products on behalf of its own newly-developed brands. It is concerned with creating a new value for which customers will be willing to pay. The company should harness marketing efforts, operations, finance, and R&D to support achieving competitive goals. The recommended tactics, concerned with the strategic actions for promoting CBD products, will include paid content placements, Pay Per Click (PPC), native advertising, sponsorships, and influencer endorsements, all of which have already been applied to marketing the specific type of products.
The strategy will be implemented through several essential steps, beginning with product development. CBD products are a unique opportunity to become integrated into mainstream channels, including pharmacies or direct-to-consumers. First, Altria will research purchasing profiles using real-time CBD consumer datasets, such as repeat purchase rates or customer lifetime value. Second, the company will calculate the market shares of CBD products by category, ranging from cosmetics to medicine (Learn Hub, 2019). Third, based on the above findings, Altria will create the most highly-demanded products based on its latest R&D efforts.
The second step is concerned with the implementation of operational strategies that the majority of competitors in the CBD market carry out. Beyond R&D, there is a need for establishing joint ventures, partnerships, collaborations, as well as mergers and acquisitions (“Global cannabidiol (CBD) oil industry report 2020,” 2020). High demand in the market requires the company to implement both cost and product differentiation, ongoing product development, as well as upgrades and adjustments intended for sustaining profitability.
The third and most important step is concerned with effective and appropriate marketing efforts that will help the organization market its newly-developed products to the target audience. Initially, Altria will have to comply with local and national guidelines when marketing cannabis-related products under the rules of the Federal Communications Commission. Another component of the step is concerned with establishing a robust digital presence, including investments in the website, the creation of helpful and relevant content, and encouraging customer reviews and ongoing feedback.
With the help of social media and digital advertisement purchasing, the company can market its innovative CBD products to the target consumers, which are mainly represented by a younger demographic (Learn Hub, 2019). Finally, brand ambassadors can play a crucial role in product promotion. Notably, the cannabis brands developed by Altria can benefit from developing relationships with influencers and celebrities that have social media platforms that match the typical customer profile for CBD products.
The proposed strategy presents several issues for Altria when it comes to manufacturing and selling innovative CBD products. The major challenge is that the financial tools available in the market are restrictive in their requirements, the limited options of payment, as well as high fees (Weed, 2019). This means that the company will have to find reliable e-commerce or physical retail platforms to fit the needs of the new product marketing. Another challenge of the strategy implementation is associated with setting Altria’s CBD brands apart from others because there are currently over 3,000 companies specializing in cannabinoid products (Weed, 2019).
The company should have to amplify the trust of consumers through loyalty programs or friend referrals, which are the strategies intended to attract clients. An important consideration of the strategy is concerned with distribution channel insights, such as the segmentation of the cannabidiol market from business-to-consumer (B2C) to business-to-business (B2B). Within the strategy, the focus will be initially placed on the B2C sector because its revenue share is expected to grow more compared to B2B (Grand View Research, 2019). Altria will focus on providing readily available products to consumers to drive segment growth.
To conclude, Altria’s current strategic direction is focused on the tobacco industry, which is on the decline. With the increased availability of Reduced-Risk and cannabinoid products, it makes sense for the company to invest in Research and Development efforts to capture a new market segment represented by CBD products, the demand for which is rising continuously.
The strategic direction that Altria should take is concerned with long-term growth through innovation and technological advancement efforts that would allow bringing new products to the market. Considering the potential challenges that the tobacco industry will experience in the future, the culture of embracing change and diversification should be encouraged at Altria. Regardless of the products that the company chooses to produce in the CBD market, the focus area for Altria is becoming a leading supplier of innovative CBD and Reduced-Risk Products to the market.
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