Latest Altria Acquisition Bolsters Its Smokeless Segment

Snus may sound like a Dr. Seuss character, but the smokeless tobacco product is among the fastest-growing tobacco-derived nicotine (TDN) products on the market today. Data from market researcher IRI shows TDN products grew 250% last year, hitting some $60 million in sales. Although that pales in comparison to actual cigarette sales, it clearly indicates that as combustible cigarettes fall further out of favor, people are looking for reduced-risk alternatives to get their nicotine fix.

As the leading U.S. cigarette manufacturer, Altria (NYSE: MO) feels the impact of cigarettes' decline more acutely than others, it seems determined to build up a portfolio of products separate from them. It just announced it was paying $372 million for an 80% stake in the global business of Burger Sohne, a Swiss tobacco company that makes a snus-like product called on! for which it expects to quickly expand distribution in the U.S.

What is snus?

Snus (pronounced "snoose") is very similar to both snuff and chewing tobacco. While the latter, typically made from long leaves of tobacco, is familiar to most Americans, snuff is finely ground tobacco that is typically inhaled into the nasal cavity for quick delivery of nicotine.

Snus, on the other hand, while also finely ground or powdered tobacco, and sometimes sold loose, is more often found in small teabag-like pouches placed between the lip and gum. Altria sells snus under its Copenhagen and Skoal brands.

on! is similar to snus in that it is a nicotine pouch that is placed under the upper lip, but it is tobacco-free. Rather, on! and similar pouches like Swedish Match's Zyn brand contain nicotine salts derived from tobacco and other food-grade ingredients as filler and flavor enhancers.

Hitting the ground running

Altria notes the on! pouches are in limited supply in the U.S., at just a few thousand retail outlets, though they're more widely available in Sweden and Japan. Snus, however, is banned in the European Union, though an exemption was made for Sweden, where the product is more popular than cigarette smoking.

The tobacco giant plans to quickly expand distribution of on! and said the transaction with Burger Sohne includes a clause that allows it to begin distributing the smokeless product right away. Once the sale is complete, by the end of the second half of 2019, Burger Sohne will operate under a new subsidiary Altria created called Helix Innovations.

The benefit for Altria is that by acquiring on! instead of developing its own product, it doesn't have to go through the regulatory process of getting it approved by the FDA. on! has been on the market since 2016.

Betting on alternatives

The acquisition represents a further diversification away from cigarettes, as Altria now owns or has invested in the following reduced-risk entities:

  • Skoal and Copenhagen brands of snuff and snus
  • Electronic cigarette maker Juul Labs
  • Philip Morris International's IQOS heated tobacco device
  • on! tobacco-free nicotine pouches

Altria, of course, also invested a 45% stake in cannabis producer Cronos Group in the hopes of offsetting the decline of cigarettes. Nielsen data shows cigarette sales tumbled over 11% in a four-week period last month, and Altria just surprised the market by raising its cigarette prices by another $0.06 per pack only two months after it raised them $0.11 well before fall, when it usually raises prices. Analysts suspect tobacco companies will now take three price increases this year instead of two.

As cigarette usage continues to decline, investors may see companies making more investments in alternatives. While consumers may not be as accepting of price increases on snus and e-cigs as they are of price increases on cigarettes, such investments may give Altria a more stable base of consumers and access to markets that are at least growing.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.