United States: Premium cigarettes must compete with discount cigarettes

The overall erosion of cigarette sales and the impact of inflation are benefiting cheaper brands, to the detriment of so-called "premium" brands. Altria and British American Tobacco must cut their profits to compete in the discount market and try to reassure their investors.

Over the past twenty years, progress in tobacco control and the rise of e-cigarettes have revolutionized the tobacco market in the United States. Smoking prevalence is declining, and with it, the demand for cigarettes. The average age of smokers is rising. From 20% in the early 2000s, the proportion of smokers over 50 is on track to reach 50% by 2030, according to an analyst at TD Cowen. Despite its efforts with new tobacco and nicotine products, the tobacco industry is struggling to recruit new smokers to replace the old ones—which has been its business model since the early 20th century.

Sales of “premium” cigarettes are crumbling

Financial analysts are now noting that the slowdown in the cigarette market is affecting so-called "high-end" brands more. premium ", which are sold more expensively than other cigarettes[1]These brands are owned by the main tobacco majors: Marlboro and Parliament for Altria, Newport and Camel for British American Tobacco (BAT). They must notably face competition from the brands " discount ", that is to say the cheapest, whose sales have increased significantly due to the increase in the price of tobacco products. The Montego brand, the best-selling among cigarettes discount, for example, has experienced growth of 15 % over one year, while the brands premium showed a decline of 11 %.

The ability of tobacco majors to maintain high profits despite declining cigarette sales has long reassured their investors. These majors usually compensated for the decline in cigarette sales by increasing the price of brands. premium, and maintained the profitability of their products in a somewhat artificial way. The development of brands discount has weakened this logic and has been supported by a return of inflation over the last two years. The price differential between brands discount and Marlboro has thus widened, going from 31 % in 2018 to 43 % in 2023. Becoming more sensitive to the price argument than to the qualities attributed to cigarettes premium, smokers are gradually abandoning the latter.

Tobacco majors' responses to the discount cigarette market

The tobacco majors have not failed to respond. As early as 2018, Altria saw sales of its cigarettes crumble as JUUL e-cigarettes took market share. Altria responded by buying back a third of JUUL Labs' shares to take control, before selling them in 2023 to avoid legal action. Now, it's the turn of disposable e-cigarettes (" puffs ") that Altria attributes to young people's disinterest in tobacco products. In one year, these puffs have grown by 20 %. Many of these puffs are illegal because they have not obtained marketing authorization from the Food and Drug Administration (FDA).

Tobacco companies anticipated this disinterest among young people by developing e-cigarettes, heated tobacco devices, and oral products such as nicotine pouches. They also marketed their own discount products. Imperial Brands was already heavily involved in the low-cost cigarette market and expanded its US market share from 7.7 billion in 2018 to 9.2 billion today. Altria launched the discount brand Marlboro Friday in the 1990s and is now present in this segment with the Marlboro Black Gold brand, which represents a tenth of its current sales. In 2021, BAT halved the price of its Lucky Strike cigarettes, which sold very little at the time and have since gained 4 billion of the cigarette market.

Be present on the cigarette market discount However, this puts Altria and BAT in difficult positions. This means losing profitability and therefore reducing dividends, which risks diverting shareholders to other, more productive investments.

Keywords: United States, tobacco market, Altria BAT, Imperial Brands, JUUL

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[1] Ryan C, Big tobacco can no longer name its price, The Wall Street Journal, published November 4, 2023, accessed November 7, 2023.