John Barrymore Feb. 24, 2015
BA 3103 –XXX
T&R, 11:00 AM – 12:20 PM
Big Tobacco and the Advent of E-Cigarettes
Background
The U.S. tobacco industry is among the most heavily regulated and heavily taxed industries in the United States (The Economist, 2014). Medical evidence of the adverse effects of smoking continues to grow, and the share of American adults who smoke has declined markedly during the past fifty years, from 42% in 1965 to less than 18% in 2013 (CDC, 2013). But in spite of ever-increasing regulation and public wariness of the U.S. tobacco industry, tobacco companies continue to thrive. This oligopoly industry, dominated by big tobacco companies Altria, Reynolds American, and Lorillard, serves a shrinking but remarkably loyal customer base. Critics are quick to point out that, despite extensive regulation of the marketing practices in the industry, tobacco products remain highly lucrative, with sales of over $66 billion in 2014 (Hargreaves, 2014).
This beleaguered but very profitable industry must now deal with another, potentially very disruptive innovation in the form of e-cigarettes. This new product category, the modern version of which dates from 2007, generated U.S. sales of $2.5 billion in 2014 (Richtel, 2014). Although the e-cigarette sector is still relatively small, it clearly has the potential to disrupt tobacco sales in the coming years. E-cig use is generally perceived to be less unhealthful than cigarette smoking, and the e-cig habit is substantially less costly than consuming tobacco cigarettes (Richtel, 2014). Moreover, e-cigarettes are far less regulated than tobacco products, without many of the marketing constraints.
The early success of e-cigarettes has not gone unnoticed by the big tobacco companies. Lorillard was the first to enter this sector with the acquisition in 2012 of the Blu eCig brand (Esterl, 2012). Since then, Altria and Reynolds American have indicated their intention to introduce e-cig product lines (Richtel, 2014).
Problem Statement
Tobacco companies must address the advent of e-cigarettes in order to defend their tobacco business and to identify business opportunities in the growing e-cigarette product sector.
Alternative
Solution
s
In order to limit the impact of e-cigarettes on the sales of tobacco cigarettes, tobacco companies can lobby for additional regulation of this new product category. Increased regulation will help to “level the playing field” and reduce the advantages enjoyed by e-cigs as a consequence of their largely unrestricted marketing. Among the areas for increased regulation of e-cigarettes, the tobacco companies can lobby federal, state, and local governments to ban television and radio broadcasting of e-cig advertising, prohibit online sales of this product category, and proscribe e-cig use in public places. These changes will reduce some of the advantages of e-cigs over tobacco products, thereby presumably slowing the market acceptance.
1. John Barrymore Feb. 24, 2015
BA 3103 –XXX
T&R, 11:00 AM – 12:20 PM
Big Tobacco and the Advent of E-Cigarettes
Background
The U.S. tobacco industry is among the most heavily regulated
and heavily taxed industries in the United States (The
Economist, 2014). Medical evidence of the adverse effects of
smoking continues to grow, and the share of American adults
who smoke has declined markedly during the past fifty years,
from 42% in 1965 to less than 18% in 2013 (CDC, 2013). But
in spite of ever-increasing regulation and public wariness of the
U.S. tobacco industry, tobacco companies continue to thrive.
This oligopoly industry, dominated by big tobacco companies
Altria, Reynolds American, and Lorillard, serves a shrinking but
remarkably loyal customer base. Critics are quick to point out
that, despite extensive regulation of the marketing practices in
the industry, tobacco products remain highly lucrative, with
sales of over $66 billion in 2014 (Hargreaves, 2014).
This beleaguered but very profitable industry must now deal
with another, potentially very disruptive innovation in the form
of e-cigarettes. This new product category, the modern version
of which dates from 2007, generated U.S. sales of $2.5 billion
in 2014 (Richtel, 2014). Although the e-cigarette sector is still
relatively small, it clearly has the potential to disrupt tobacco
sales in the coming years. E-cig use is generally perceived to
be less unhealthful than cigarette smoking, and the e-cig habit
is substantially less costly than consuming tobacco cigarettes
(Richtel, 2014). Moreover, e-cigarettes are far less regulated
than tobacco products, without many of the marketing
2. constraints.
The early success of e-cigarettes has not gone unnoticed by the
big tobacco companies. Lorillard was the first to enter this
sector with the acquisition in 2012 of the Blu eCig brand
(Esterl, 2012). Since then, Altria and Reynolds American have
indicated their intention to introduce e-cig product lines
(Richtel, 2014).
Problem Statement
Tobacco companies must address the advent of e-cigarettes in
order to defend their tobacco business and to identify business
opportunities in the growing e-cigarette product sector.
Alternative
Solution
s
In order to limit the impact of e-cigarettes on the sales of
tobacco cigarettes, tobacco companies can lobby for additional
regulation of this new product category. Increased regulation
will help to “level the playing field” and reduce the advantages
enjoyed by e-cigs as a consequence of their largely unrestricted
marketing. Among the areas for increased regulation of e-
cigarettes, the tobacco companies can lobby federal, state, and
local governments to ban television and radio broadcasting of e-
cig advertising, prohibit online sales of this product category,
and proscribe e-cig use in public places. These changes will
3. reduce some of the advantages of e-cigs over tobacco products,
thereby presumably slowing the market acceptance of this
product category.
The tobacco companies can also lobby the federal government
to regulate e-cigarettes as an over-the-counter pharmaceutical.
The Food and Drug Administration (FDA) would then regulate
product approvals and monitor the distribution of e-cigs across
the United States. Compliance, in the form of application
submissions, clinical testing, and pre-market approvals, will be
costly for applicants. This will likely limit the number of new
entrants in this market, and will therefore help to reduce the
intensity of market competition.
In order to further blunt the effect of new entrants in the
marketplace, tobacco companies can acquire any promising e-
cig brands in order to manage the marketing communications
and distribution of these products – or perhaps to simply
discontinue these lines. Lorillard acquired Blue eCigs and is
seeking to grow this product without cannibalizing the sales of
its tobacco cigarettes. Similarly, Altria and Reynolds American
could acquire existing product lines in order to manage
competition in the tobacco industry.
Recommendations
The best solution for dealing with the threat posed by e-cigs is
to seek new legislation to regulate this growing product
4. category. By lobbying for new product clinical trials and pre-
market approvals, the tobacco companies will raise the cost of
entry for new competitors. Similarly, bans on broadcast
advertising and online sales will reduce the advantages
currently enjoyed by e-cig marketers over tobacco marketers.
The advantage of these solutions to the tobacco companies stem
from their substantial existing capabilities for lobbying federal,
state, and local governments. The tobacco companies would
only need to shift their lobbying emphasis from their tobacco
products to the new e-cigarettes.
Program Performance Metrics
An intermediate metric to determine the effectiveness of any
new regulatory legislation is the number of new entrants in the
e-cigarette product category. If the newly erected entry
barriers reduce the number of entrants, this would provide an
early indication of success. Also on an intermediate basis, it
will be possible to determine the success of newly implemented
marketing regulation of e-cigs by tracking current and potential
customers’ awareness of e-cigarette brands prior to and
following the enactment of such regulations. There should be a
statistically significant decline in awareness levels following
the enforcement of regulations.
A conclusive metric of the success of tobacco companies’
lobbying programs is the goodwill premium associated with the
5. market capitalization of e-cigarette companies. If the entry
barriers and marketing regulations are successful, the goodwill
premium of these firms should decline. The resulting higher
cost of capital will presumably reduce their ability to compete
in the market and thereby to take market share from the tobacco
companies.
What I Have Learned from This Critical Analysis Exercise
The e-cigarette product category is a disruptive innovation
because of its potential to reduce demand for tobacco products.
There are clear indications that tobacco companies are taking
the necessary steps to defend their very lucrative market, but
these efforts are still at an early stage. We can expect further
efforts by the tobacco companies to protect their positions,
perhaps by lobbying more intensively for the regulation of e-
cigarettes.
Bibliography
Anon. (2014, January 5) “Running out of puff: Big tobacco
firms are maintaining their poise, but quietly wheezing” The
Economist
Centers for Disease Control and Prevention (CDC) (November
2013) "Cigarette smoking among adults—United States, 2013"
Esterl, Mike, (2012, April 25) “Got a Light – er, Charger: Big
6. Tobacco’s latest Buzz”, The Wall Street Journal
Hargreaves, Rupert (2014, April 18) “Tobacco is Still an
Extremely Profitable Business, and This Won’t Change Soon”
The Motley Fool ,
http://www.fool.com/investing/general/2014/04/08/tobacco-is-
still-an-extremely-profitable-busines-2.aspx
Richtel, Matt (June 17, 2014) “Why big tobacco companies are
betting on e-cigarettes” The New York Times
2
Coca-Cola at a crossroads with new CEO in charge
As new CEO James Quincey takes over from the outgoing
Muhtar Kent, he faces challenges that have turned Buffett's
aphorism into a painful reminder of better days.
By Russell Grantham Atlanta Journal-Constitution
May 7, 2017
7. ATLANTA – Legendary investor Warren Buffett once was
quoted as saying Coca-Cola was such a strong company that a
ham sandwich could run it.
As new CEO James Quincey takes over from the outgoing
Muhtar Kent, he faces challenges that have turned Buffett’s
aphorism into a painful reminder of better days.
The Atlanta company is still hugely profitable, but increasingly
under pressure. Soda sales stalled, and its core Coke brand
slipped in the U.S. market as people cut back on sweet,
fattening drinks in recent years. The beverage market is more
fragmented, with new choices constantly materializing. Coke is
pushing to broaden its lineup with non-fizzy brands, but its
lifeblood remains soda.
Behind its perpetually sunny marketing facade, Coke in recent
years has spent enormous corporate energy rearranging
internally and retooling operations to deal with new
marketplace realities.
Onto the stage now steps Quincey, a British-born, 21-year Coke
veteran who is expected to bring new ideas and vitality.
His tenure didn’t start quietly. On Tuesday, in what was
essentially his first act as CEO, Quincey used an earnings call
with financial analysts to announce job cuts that will hit the
headquarters staff in Atlanta hard.
The company plans to eliminate 1,200 jobs later this year from
8. a pool of 5,500 corporate positions. The cuts are part of a plan
to save about $800 million through 2019.
Quincey said the cuts are “clearly a painful process,” but
necessary. He said job decisions will be made “as fairly as
possible,” but also with “speed.”
“People don’t want this to linger on,” he said in an interview.
Quincey said the plan is to use about half of the savings to
speed investment in new products and marketing, and to restore
Coke’s revenue and profit growth to 4 to 6 percent per year.
“There’s an acceleration we’d like to see,” Quincey said. “I
don’t think we’re broken, but I don’t think we’re where we need
to be.”
While soda sales are an obvious sore spot, they aren’t Coke’s
only issue. Assessing the company’s fortunes from the outside
has been complicated in recent years by an overhaul of bottling
operations.
In 2010 Coke bought North American bottling operations from
partner Coca-Cola Enterprises. It did the same with hundreds of
bottlers around the world. Coke for a time took control of the
operations, significantly enlarging the company. Now it’s
spinning them back out to new partners.
Coke’s revenue has slipped for the past four years — from $48
billion in 2012 to $41.9 billion last year — in part because of
the accordion effect of the bottling overhaul.
The 130-year-old company’s star has also faded a bit in other
9. ways.
In 2007, Coca-Cola was the most valuable brand in the world,
according to London consulting firm Brand Finance, which
ranks brand values annually, based on its own calculations. Now
it’s 16th in the U.S. and 27th in the world, according to the
firm’s latest list, well behind companies like Google, Apple and
Amazon.com.
Born in London, Quincey spent part of his youth in Hanover,
N.H., where his father lectured at Dartmouth.
Quincey earned his degree from the University of Liverpool but
decided he was better at business than engineering. He joined
giant consulting firm Bain, which eventually led to a job at
Coke.
Quincey, who is fluent in Spanish, spent much of his Coke
career in Europe and Latin America.
The biggest of the company’s problems is that people are simply
less likely to reach for a soda than in the past, and there’s little
indication that the trend is fleeting.
Coca-Cola’s “megabrand” sales volume — Coke and its variants
— fell almost 5 percent over the past three years in the U.S. and
were down almost 1 percent worldwide, according to company
filings to the U.S. Securities and Exchange Commission. Those
core brands account for nearly half of sales volume.
The decline is partly due to health concerns that sugary drinks
contribute to obesity and diabetes.
10. But more than soda politics are at work. Consumer tastes are
shifting toward new products, experts say. They are being
supplied by competitors popping up all over, they say, because
it’s getting easier for small companies to launch new drinks and
get them into markets.
This more fragmented market is requiring Coke to shift from its
“have a Coke” mind-set to a fast-moving, portfolio approach to
the market.
Gold Peak tea, launched about a decade ago by Coke, passed $1
billion in annual revenue about four years ago, and is now the
No. 3 tea brand in the U.S. Another, Smartwater, is the result of
Coke’s $4 billion-plus Glaceau acquisition in 2007, while
Dunkin’ Donuts Iced Coffee is a recent rollout from a joint deal
with that company.
One dud: an ill-fated 2015 venture with Keurig to market a
single-serve soda dispenser called Keurig Kold. Kent called it a
“game-changer,” but the machine bombed and was discontinued
within months.
Quincey expects that by 2019 the fruits of Coke’s rejuvenation
efforts will be more obvious.
“Those that are willing to crunch the numbers can see it now,”
he said.
2
11. Why big tobacco companies are betting on e-cigarettes
New York Times Jun 17, 2014
Tags:
By Matt Richtel
Electronic cigarettes, promoted as a healthier alternative to
tobacco, are getting powerful new backers with an unhealthy
reputation: big tobacco companies.
The development points to ways Big Tobacco is moving to turn
the young e-cigarette market to its advantage.
E-cigarettes have become an overnight sensation, with $2.5
billion in sales, though that is a tiny fraction of the smoking
industry. The devices have also touched off a public health
debate. Some argue e-cigarettes, which vaporize nicotine, offer
a less dangerous alternative to cigarettes. Others warn there is
insufficient evidence on the product's health risks and whether
e-cigarettes are prompting people to quit smoking.
In fact, the tobacco companies say they do not yet see evidence
that most smokers are captivated by e-cigarettes, but they could
become so.
A subsidiary of Reynolds American, which is known for Camel
cigarettes, plans to announce Tuesday that it will start
distributing its Vuse e-cigarettes nationwide June 23. NuMark,
a subsidiary of Altria, known for Marlboro cigarettes, plans to
12. follow suit by year's end with MarkTen, as signs emerge
showing that e-cigarettes are nipping into sales of cigarettes.
Both companies join Lorillard, which owns the nation's
dominant e-cigarette brand, Blu eCigs.
Joining Lorillard, Reynolds plans a national marketing
campaign, including television advertisements in major markets.
E-cigarette makers say that move could popularize an
alternative to tobacco, but critics warn it could glamorize
smoking and lead people to smoke again.
Public health officials have taken issue with the advertising tag
line NuMark uses on some ads for MarkTen: "Let It Glow." The
critics say the campaign plays off Disney's animated musical
"Frozen" and its hit song "Let It Go."
Concerns about marketing of e-cigarettes, and whether the ads
appeal to children, have prompted a Senate hearing planned for
Wednesday. The Food and Drug Administration recently
proposed guidelines for regulating e-cigarettes but did not
propose any restrictions on marketing, drawing criticism from
some public health groups. Marketing of cigarettes is heavily
restricted, with TV ads forbidden.
Matthew L. Myers, president of the Campaign for Tobacco-Free
Kids, who is scheduled to testify at the Senate hearing, said the
fact that the FDA did not limit marketing allowed tobacco
companies to return to the airwaves with ads that make e-
cigarettes sexy, rebellious, glamorous - "exactly the same
13. themes we saw work with kids in the U.S. for decades with
cigarettes."
In the absence of marketing regulation, "they will set the
agenda," Myers said of the tobacco companies. "They will drive
the evolution of the product in a way that serves their interests
and not public health, and that's exactly what's happening."
But Stephanie Cordisco, the president of R.J. Reynolds Vapor
Co., a Reynolds American subsidiary, said the company was
going down a new path with e-cigarettes, with an eye to public
health. She said Vuse would initially be available in 15,000
stores, supported by a national marketing campaign, including
TV.
"I know the perception of who we are and what we stand for,"
Cordisco said, adding later, "We're here to make sure we can
put this industry on the right side of history." She continued:
"We're trying to redefine tobacco enjoyment and give smokers
an alternative, one that potentially reduces harm."
Still, Cordisco took a shot at Lorillard and Altria for what she
said was irresponsible marketing. She said the "Let It Glow" tag
line was "terrible," and that she found Lorillard's advertising for
Blu "distasteful," which included a sexy advertisement in the
annual swimsuit edition of Sports Illustrated. She also criticized
the use of celebrity advertising.
"Those running the most irresponsible campaigns are the ones
14. who know better," Cordisco said. The marketing campaign for
Vuse, which is built around the slogan "a perfect puff" every
time, is not aimed at children, she said.
David B. Sutton, a spokesman for Altria, which owns NuMark,
the seller of MarkTen e-cigarettes, said the "Let It Glow"
campaign that began this month was aimed at adults. Robert
Bannon, head of investor relations at Lorillard, defended Blu
ads as "trying to make the products as attractive to consumers
as possible, and we don't think there's a problem with that."
Echoing the views of companies in the e-cigarette industry,
including small players, he said such advertising is the way to
tell consumers about "a viable alternative to combustible
cigarettes."
Lorillard has said it spent $40 million last year marketing Blu,
mostly on TV ads. Bannon said the company planned to keep
spending at about that level in the near term. The ads have paid
off, but only to an extent. Sales of Blu hit $54 million in the
fourth quarter of last year, but slipped to $51 million in the first
quarter. Part of that might reflect changing consumer tastes,
including the emergence of new e-cigarette technology, called
tank systems, which present an alternative to e-cigarettes.
Sales of e-cigarettes are minuscule compared with Lorillard's
overall annual sales of $7 billion. Of that, Lorillard's profit was
around $1.2 billion, while the profit from e-cigarettes was just
15. $6 million, raising questions of why tobacco companies are
pushing so aggressively into the new market.
Bannon, of Lorillard, said the company saw two reasons to
invest in e-cigarettes: first as an insurance policy in case e-
cigarette sales took off, and second as a self-funding source of
research and development into e-cigarette technology.
Such assurances aside, critics of the tobacco industry are wary.
"You've got to be extremely skeptical about what they're up to,"
said Gregg Haifley, director of federal relations for the
American Cancer Society. Tobacco companies are not interested
in getting people to quit smoking, he said. "They're just too
profitable for them to be interested in doing that."
Haifley also warned that unfettered marketing of e-cigarettes
would allow the tobacco companies to define the activity of
smoking an e-cigarette as "sexy, youthful and vigorous," and
that in doing so, they may drive people back to cigarettes, their
main market. And that, he said, would be a big setback for
public health.
"To the extent that we've de-normalized cigarettes," Haifley
said, "e-cigarettes are undercutting that de-normalization."
Bonnie Herzog, a financial analyst who covers the tobacco
industry for Wells Fargo Securities, and who projects growth
for e-cigarettes, said that the companies had big money to spend
on marketing and that they had enormous influence over what
16. kinds of products carried in convenience stores. Herzog said the
Big Tobacco companies also got a lift over smaller e-cigarette
companies from the recently proposed federal regulations. The
regulations, which the FDA says may evolve, require disclosure
about e-cigarette ingredients and manufacturing but don't
restrict marketing, favoring companies that have money to
spend.
Cordisco, the president of Reynolds' vapor subsidiary, said,
"We're not here to put the small players out of business."
But, she added, "If anyone can deliver a product that meets the
needs of smokers in satisfaction and taste, it would be us."