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Porter’s Five Forces: Altria Group’s Dominant Positioning

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Intensity of competition

Altria Group (MO) is a leading manufacturer and seller of smokeable products, smokeless products, and wine. Altria’s tobacco-based premium brands include Marlboro, Black & Mild, Copenhagen, and Skoal, all of which face stiff competition from many national and international companies.

Competition in the highly consolidated US tobacco industry further intensified after the merger between Reynolds American (RAI) and Lorillard Tobacco Company. Altria’s Marlboro menthol now faces stiff competition from Newport menthol, which accounts for ~80% of Lorillard’s total consolidated sales.

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Bargaining power of suppliers and buyers

In the US, Philip Morris USA purchases burley and flue-cured leaf tobacco of various grades and style directly from tobacco growers. Also, tobacco production in some countries is subject to government mandated prices and production control programs. Hence, changes in demand for agricultural products and the cost of tobacco production impacts both tobacco leaf prices and tobacco supply, which could adversely affect tobacco subsidiaries of Altria.

Ste. Michelle’s grape supply is also influenced on consumer demand for wine. Supply shortages could increase production costs and wine prices.

Cigarette buyers are committed and loyal. In this industry, demand is less responsive to changes in price, unless there is a huge price difference in competitor brands. Hence, buyers have low bargaining power, since the industry is consolidated with fewer substitutes to turn to, in the event of price hikes.

Threat of new entrants and substitutes

The tobacco industry is horizontally integrated, with few dominant players, among them Altria, Philip Morris International (PM), British American Tobacco (BTI), Reynolds American (RAI), and Japan Tobacco (JAPAF). These companies have large-scale economies in manufacturing, branding, packaging, distribution, and marketing. Hence, it’s very difficult for a new company to enter and compete.

Substitutes for cigarettes are products such as nicotine patches, gum, nasal sprays, lozenges, and other products. However, e-cigarettes are new substitutes in the market, which have been seeing unprecedented growth over the past few years. MO along with its former subsidiary PM plans to capitalize the e-cigarette market, which will benefit MO’s growth.

Altria has exposure in the SPDR S&P 500 ETF (SPY), with 0.6% of the total weight of the portfolio as of August 31, 2015.

In the next part of this series, we’ll look at Altria Group’s brand stable.

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