Quick Thoughts on Altria, JUUL & Distribution
Just like a car that needs to refuel, a nicotine addict must also top up the substance for which their normal functioning depends. In essence a nicotine addict must “fill up the tank” to keep the neurons in their brain satisfied, similar to the petrol in the tank of a car that keeps the cylinders firing and the car moving.
As we are seeing with the current auto market, EV vehicles are at a disadvantage in terms of refuelling, due to the meagre distribution of high-power charging stations. In comparison, drivers of ICE vehicles have the advantage, as they are able to benefit from the large distribution network of petrol stations.
This distribution network is the product of half a century of continued efforts by petrol companies to improve their distribution networks to serve drivers of ICE vehicles in 170,000 convenient locations.
In the tobacco industry, brand loyalty is strong, making it important for a smoker of a particular brand to be able to purchase their preferred cigarettes in multiple convenient locations. This is because you don’t want your customers finding it hard to be loyal, by having other more readily options available.
Over the last half a century whilst the auto fuel industry was continuously expanding its distribution network so was Big Tobacco. Millions of hours, spent by thousands of sales staff, over 50 plus years, produced North America’s most extensive tobacco distribution network. Having shelf space in 230,000 locations across the USA. This network is still in place and is owned and under the control of Altria (Phillip Morris USA) through Altria Group Distribution Company.
The result is that Marlboro smokers can purchase their preferred brand of cigarettes when out at dinner, on the way to work or at the service station when filling the car with petrol. It is this network that allows Altria customers to constantly service their nicotine addiction with Altria owned brands. It also allows Altria to attract existing smokers, if their preferred brand of cigarettes are not available.
Whilst being a substantial moat to any unlikely new entrants, Altria is also set to leverage their distribution network with JUUL pods and devices, in which they own 35%. Already the market leader in the US Vaping market, JUUL will likely be available to purchase throughout all of Altria’s distribution network, with no other e-vapour producer having access to a network of comparable size and depth.
Altria and JUUL have recently revised their agreement to not include the use of Altria controlled shelf space, with the two companies focussing their cooperation on meeting looming regulatory requirements for JUUL products.
I believe this revision will be transient, and use of Altria’s distribution network for the sale of JUUL products will once again happen. This is not a fact and just my opinion. The opinion is based on an assumption that accelerated distribution was stopped due to retailer backlash and to concentrate on meeting regulator requirements, both a product of the e-vapour epidemic scare of 2019.
A relevant example is that of a JUUL user in Australia, where the commercial sale of e-liquid containing nicotine is illegal, meaning all users need to purchase their pods online well in advance of use.
The scenario goes as so, an individual takes her JUUL out with her to meet friends for a drink at a local bar. She is enjoying her time and stays longer than she thought. Given that she thought she was only going to have a glass of wine or two she didn’t bother to bring a spare pod and after her 3rd glass of wine her pod is bone-dry. Passing on the offer of a cigarette from her friend during the 4th glass of wine her craving for nicotine during the 5th glass becomes too much, and seeing that it is only 9pm, and this is looking like a big night, she decides to buy a packet of cigarettes. Due to the lack of distribution she encounters this problem multiple times throughout a period of two months and decides to stick with Marlboro Gold, it is far too convenient and her brain cells have become accustomed to its smell and taste.
Why does this even matter? Well this is a permutation that does not appear too unlikely, and which I believe may well play out. With a distribution network of Altria’s scope, it is easy to see the inherent growth potential. Most importantly though at Altria’s current valuation any investor is receiving a free call-option on any level of JUUL upside, meaning the probability of this upside is not priced in.
There is much more to the traditional combustible tobacco segment. I recommend you read my previous piece to develop a better understanding of that business.