Where there's smoke, there's Philip Morris USA (PM USA) products. The subsidiary of tobacco giant Altria Group is the #1 US cigarette maker. PM USA also dominates half of the nation's retail cigarette market. Its Marlboro brand alone accounts for more than 40% of cigarette retail sales in the country. Other brands include Virginia Slims and Parliament; its discount cigarettes are sold under the Basic and L&M names. In the US, the company also makes Marlboro Snus, a smokeless, spit-free, tobacco pouch. Altogether, cigarettes generate more than 80% of its parent's revenues. Like industry rivals, PM USA faces declining cigarette sales volumes paired with rising state and federal excise taxes and FDA regulation.
Cigarette sales volumes have declined in recent years by more than 10% and 5% in 2009 and 2010, respectively, from prior years. Despite the consumer preference toward lower-priced cigarette purchases, PM USA's premium cigarettes, which represent roughly 90% of total volumes shipped, were only slightly crushed. (Discount brands slid more than 15% in 2010 from 2009.) The company countered the lackluster volumes via a series of price increases for all of its cigarette brands. As a result, revenues increased modestly, helping to fuel approximately an 8% rise in operating income.
Operating income was buoyed by lower asset impairment and manufacturing costs. The volume declines on top of federal excise tax increases, as well as the 2008 termination of an agreement to supply cigarettes to Philip Morris International, collectively led the company to shutter its Cabarrus, North Carolina, manufacturing facility. PM USA consolidated the cigarette-making operations with its plant in Richmond, Virginia.
PM USA maneuvers within a regulatory environment determined to discourage people from smoking. The passage of the Family Smoking and Tobacco Control Act by the US Congress in mid-2009 gives the FDA unprecedented power to regulate tobacco offerings, including the authority to regulate marketing, ban candy flavorings, and reduce nicotine in products. As part of new FDA health warnings introduced in 2011, PM USA saw the most significant change to US cigarette labeling in more than two decades. The move directed that the graphic pictures and text must cover the top 50% of packs (the top 20% of advertisements) effective September 2012.
Additionally, PM USA faces an apparent decline in Marlboro's popularity among smokers ages 18 to 25. Although the brand has retained an older following, its loyalty is typically established early. To broaden appeal among this key demographic as well as compete with lower-priced products, the company has launched new versions of Marlboro, including (smokeless) Marlboro Snus. Further capitalizing on the growing smokeless alternative market, Marlboro Snus was revamped with new packaging and pricing after being test marketed. In 2011 packs containing tobacco-coated sticks measuring two and one-half inches long were rolled out in a variety of flavors under both the Marlboro and Skoal (made by UST) labels.
Altria has long tinkered with its tobacco business. The parent made its big move into the smokeless market in 2009 when it acquired UST. In 2008 it spun off Philip Morris International in an effort to separate its fast-growing international tobacco business from its lagging PM USA unit.
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