Altria's (MO) New Product Not Up to Snuff

January 11, 2008 11:55 AM EST
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Yesterday, Davenport & Company released a research report analyzing the recent test launch of Altria's (NYSE: MO) Marlboro Moist Smokeless Tobacco. The new product was originally viewed as a possible competitor to UST's (NYSE: UST) smokeless tobacco brands, sparking fear in UST investors, but, as Davenport's research found, such a claim may no longer be legitimate.

Altria's tobacco branch, Philip Morris, released its new smokeless tobacco product in Atlanta in October '07 for test. The price for a can of Marlboro Moist Smokeless Tobacco was initially set at $3, a dollar cheaper than either of UST's popular brands -- Copenhagen and Skoal -- which are consistently priced at $4 per can in the area. As Davenport's checks went around to different convenience stores in the Atlanta test market, they surprisingly discovered that many stores had to lower their prices on cans of the Marlboro brand to $1.50. The retailers said they had to cut the price on the Marlboro brand as the product was either already old or just about to be, and needed to be sold or thrown away.

Almost every retailer (Wal-Mart was the exception) that was testing the Marlboro product said they saw noticeably slow sales, despite the smokeless tobacco product being brand new. Most retailers also noted a strong brand loyalty for UST's products: clerks would specifically ask customers buying smokeless tobacco products if they would try the new Marlboro brand for a cheaper price, but the majority of the consumers would respond 'no' and ask again for their favorite brand.

Going on, retailers noted to Davenport's checks that they had seen little or no return buyers out of the consumers who did try the Marlboro Moist Smokeless Tobacco. In fact, one store said it had not sold a single can of the Marlboro product for two weeks, at a time when UST brand sales remained solid. Initially, consumers seemed some-what interested in the Marlboro product and would at least ask questions about it, but as the trial period went on, fewer and fewer buyers of tobacco would inquire about the new Marlboro product.

As a result of the point-of-sale research, Davenport now feels that "UST will survive", as the lack of performance by the Altria brand product will likely not require UST to lower prices on its smokeless tobacco products. Davenport said it continues to suggest purchasing shares of UST as it sees solid fundamentals in its tobacco division and a strong growth outlook for its wine business. Davenport currently has a $62 price target on shares of UST.

At the same time, Davenport also likes shares of Altria, and would also recommend buying this stock. The firm expects Altria to announce the much anticipated spin-off of its Philip Morris International unit after the Company's Board meeting on January 30. Davenport noted it expects Altria to continue to support the smokeless tobacco initiative, as it can afford to do so, but said that Altria certainly has some work to do before an official, nation-wide release of the product.

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