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    The tobacco industry is changing and altria is in the best position to benefit

    American made marlboro cigarettes cheap carton – marlboro 100s made in

    The tobacco industry is changing as consumers are shifting their buying habits to cheaper products in times of economic uncertainty, hardship, and rising excise taxes. Consumers are shifting toward value brands and shunning traditionally expensive brands such as Altria Group’s (NYSE MO ) Marlboro and Reynolds American’s (NYSE RAI ) Camels in favor of value or mid priced brands, such as Lorillard’s (NYSE LO ) Newport.

    Numbers reveal trends
    Data supplied by Reynolds shows the scale of this ‘down trading.’ Within a recent shareholder presentation by Reynolds, the company notes that since 2006, the number of premium cigarettes sold as a percentage of the overall volume of cigarettes sold within the United States has declined from slightly more than 70% to only 58.6%. Meanwhile, the value segment of the market has expanded to 41.4% of the total market, up from slightly less than 30%.

    Source Reynolds American investor presentation

    What’s more, Reynolds reports that the market for pipe and roll your own tobacco, which is generally cheaper per equivalent cigarette, has exploded over the same period. Specifically, the annual sales of pipe and roll your own tobacco rose from 20 million pounds in 2006 to an estimated 41 million pounds for the full year of 2013.

    Source Reynolds American investor presentation

    Reflected in results
    This trend is actually reflected within the results of tobacco companies. Let’s take Altria for example with slightly more than a 50% share of the US domestic tobacco market, Altria is a bellwether for the whole domestic cigarette market. Based on full year 2013 results, the stick volume of cigarettes shipped by Altria fell by 4.1% in total. These declines were led by a 4.3% decline in the volume of Marlboro cigarettes shipped and a 10.5% decline in the volume of other premium branded cigarettes shipped.

    In comparison, the volume of L&M cigarettes shipped by Altria, which is the group’s discount cigarette, actually increased by 3.1% for the period, which mitigated some of the declines in other product categories. With value brand growth, Altria’s retail share of the discount cigarette market hit 4% in the fourth quarter of 2013, up from 3.7% at the end of 2012.

    Lorillard’s results show a different trend, however. For example, sales of Lorillard’s value branded cigarettes dropped by around 6% for full year 2013, while the volume of Kent and True cigarettes shipped by the company slumped approximately 12% year over year. These declines accelerated in the fourth quarter to 19% which makes sense considering that Kent and True are Lorillard’s premium branded cigarettes.

    Overall, the volume of cigarettes shipped by Lorillard during 2013 actually expanded by 0.5% thanks to an increase in the number of Newport branded cigarettes sold. Newport is by far Lorillard’s best selling brand with 33 billion units sold during 2013. The company’s second best selling brand Maverick only sold 5.2 billion units for the period. So, with sales of Newport ticking up 0.7% during 2013, the company’s volume of cigarettes sold during the year remained relatively constant.

    Still, with high double digit sales declines across all but two of its brands, Lorillard’s sales are slumping faster than the industry average. On average the volume of cigarettes shipped across the whole industry during 2013 declined 4.6%, this includes both the premium and value segments.

    Unfortunately, the volume of cigarettes shipped by Reynolds during the year slipped faster than those of the rest of the industry. The total volume of cigarettes shipped by Reynolds slumped 6.8% for full year 2013. The company’s sales of value branded cigarettes also slumped faster than the industry average at 7.1%.

    Foolish takeaway
    The above information tells us how the tobacco industry is shifting toward a more value oriented model and it would appear that Altria is in the best position to ride this trend. Altria has positioned itself well for the ‘down trading’ currently occurring in the domestic tobacco market and the company is being rewarded with rising sales of its discount brands, which are helping to offset declining sales of its premium brands. Reynolds and Lorillard are not in the same position.