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Price Hikes May Backfire on Altria

Peter Galuszka


Bans on smoking in restaurants, bars and other public places are slowly taking their toll on Altria, whose Philip Morris USA division is one of Richmond's biggest employers.

In the first quarter Altria reported that cigarette volume slid 6.4 percent. Consequently, net revenue from cigarette sales declined 1.9 percent from $5.12 billion in the first quarter of 2010 to $5.02 billion this year. The company managed a 15.4-percent increase in earnings per share. It did so largely because of cigarette price increases of 5 to 6 percent at the end of 2010.

The news hints at what eventually could be a vexing problem for Altria. Although the company racks up $17 billion a year in sales and its stock price is steady, it could be threatened if its core product doesn't see sales growth and the company has to depend on raising prices to keep share earnings up. In the United States, cigarette use has dropped steadily since its health risks, such as cancer and lung disease, have become widely known. 

Altria is banking its immediate future on a cost-cutting program to buy time for noncigarette products to start growing revenues, says Steven F. Marascia, director of research at Capitol Securities Management in Richmond. In the last decade, the corporation has shuttered cigarette factories in Louisville, Ky., and Cabarrus County, N.C., cutting thousands of jobs there and elsewhere. The program is expected to last until 2014 to give time for smokeless tobacco products and the firm's wine units to start growing sales.

"Cigarettes have been great for cash flow, but there has been a 4 percent annual decline in volume," Marascia says.

Altria had been banking on smokeless tobacco products such as spitless snuff to make up for the weakness in cigarette sales, but sales have been mediocre. Smokeless products including Marlboro Snus and Skoal Slim Can saw their sales fall 1.3 percent in the first quarter. Net revenues and net of excise taxes fell 0.5 percent and 0.6 percent respectively.

Altria Chief Executive Michael E. Szymanczyk tried to put a happy face on the report. "Altria delivered solid financial results in the first quarter as our businesses navigated through high unemployment, low consumer confidence and a competitive business environment," he said in a news release.

By contrast, Altria's one-time sister operation, Philip Morris International, saw cigarette volume growth of 1.6 percent driven by 14-percent growth in Asia, especially in the Philippines and Indonesia, where government regulation and public awareness of the health dangers of tobacco are less evident.

A big question for Altria, which employs about 6,000 people in the Richmond area, is how long it can sustain a business model that combines weaker sales with price hikes paid by a captive, if not addicted, consumer audience.

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