10/01/2014

Smoke ban begins Jan. 2

The New Year is a time of celebration, new beginnings and change. For smokers in Monroe, West Monroe and Ouachita Parish, this change will mean stepping outside of bars and bingo halls for a smoke. And restaurant patios will also have new rules.

If you smoke, you already know there're only certain places you can legally light-up. And in Ouachita Parish that list is going to get shorter.

Over in Downtown Monroe, River and Rail Cantina serves food until a 10 p.m., but stays open much later.

The bar is positioned between the restaurant and an open patio. However, because of the new law, the partitions will go up on Jan. 2, for good.

General Manager Max Macadam said this will take some getting use to. Camel Filters

  "We are going to comply with the law. And we hope people aren't going to be too inconvenienced about it," Macadam said.  

The inside of bars, bingo halls and restaurants will be entirely smoke free, but Jennifer Haneline with the public health institute says patios are still a gray area.

"In the parish and West Monroe, people can still smoke on patios as long as food and beverages are not served. If they are served those are also protected work spaces. In Monroe, people can still smoke on patios as long as windows are not open that allow smoke to travel back into the work place," Haneline said.  

Even though many spoke out for, and against, the new ordinances when they were being decided, Macadam said he believes attitudes about smoking have changed

"People are use to not smoking in public now. They are getting more and more use to it. We have a beautiful patio and people like to come out here, but I don't see that much smoking out here anyway," Macadam said.  

So whether you are for or against the new ordinances, one thing is for sure, the New Year will bring cleaner air in Ouachita Parish.

The United States' Fourth-Largest Tobacco Company Is About to Take the Market by Storm

Most investors will know that the United States domestic tobacco market is controlled by three main companies: Altria Reynolds American and Lorillard . However, most investors are unaware of the fourth-largest tobacco company operating within the United States, Commonwealth Brands 

 

Commonwealth Brands was bought out by global tobacco giant Imperial Tobacco back in 2007 and, as of yet, the company has failed to make a significant impact on the market even with its international backer.

 

However, after six years of waiting it would appear that Imperial is ready to throw its weight behind Commonwealth and start stealing market share from the likes of Altria, Reynolds, and Lorillard. Reynolds is the producer of Camel cigarettes.

In particular, during an interview with CNBC after the recent release of Imperial's fiscal full-year results, CEO Alison Cooper stated that Imperial saw huge potential within the US market and the company was looking to drive sales growth within the region. She also revealed that during the last year or so, Imperial had put in place a new sales team for the US market and redeveloped the company's product offering. Both of these actions were ahead of a major sales drive planned by the company. 

Domestic manufacturers should be worried as Imperial is a force to be reckoned with. Indeed, Imperial has a huge amount of firepower behind it. During fiscal 2013 the company reported revenue of more than GBP 28 billion, or $45 billion at current exchange rates, which is more than the revenue of Altria, Lorillard, and Reynolds combined. 

 

Actually, $45 billion in sales would be approximately the same as two years' worth of sales for Altria, or five-and-a-half years' worth of Reynolds' sales. If Imperial decides to aggressively attack the market shares of the domestic tobacco companies, it could leave the domestic companies fighting for their lives.

 

Keeping an eye out
While the domestic tobacco market is yet to feel the full force of Imperial's sales drive, volumes are falling and costs are being cut to keep profits rolling in.

 

Altria, for example, has been forced to grapple with the general cigarette sales decline affecting the whole industry. In particular, for the first nine months of this year Altria's total volume of cigarettes sold declined 3.6%. The general decline has forced the company to restructure, and so far the company is in line to achieve $400 million in annualized cost savings as of this year.

 

The question is if Imperial starts to grab market share, how much more fat can Altria cut out?

 

The exception
Lorillard is the exception when it comes to declining sales and the need to cut costs. Indeed, during the first nine months of this year Lorillard's cigarette sales only declined a minuscule 0.1%, with the majority of this decline being felt within the value segment of the company's cigarette offering. In particular, during the nine months to September the company's value cigarette sales declined 5.1%, while sales of full price brands expanded 0.6%.

 

These rising sales volumes were not because more people started smoking but due to the fact that Lorillard's share of the menthol cigarette market has expanded nearly 1% so far this year. As Reynolds American is the only other major menthol player in the US market, we can assume that Lorillard is stealing some of its share from Reynolds. 

 

The underdog
If I had to pick one company, I would say that Reynolds is most at risk from this invasion from Imperial. As covered above, it would appear that the company is already losing menthol share to Lorillard. The company's market share in general is declining faster than the shares of its peers.

 

For the nine months ending September, Reynolds' total volume of cigarettes sold within the US declined 6.3%, faster than the industry-average decline of 4.1% reported for the same period. 

 

Foolish summary
So overall, Imperial Tobacco's new sales drive into the US domestic cigarette market could prove troublesome for domestic companies Altria, Lorillard, and Reynolds American. However, it will be interesting to see how this sales drive by Imperial works out over the next few quarters and I am hesitant to place any bets just yet.

 

That said, if I was forced to pick a winner I would say that thanks to its international exposure, Imperial has the ability to dominate the market.

Altria Group and Philip Morris International Are the Coca-Cola of Cigarettes

Coca-Cola is frequently cited as a model of a wonderful business. Warren Buffett, the preeminent investor in wonderful businesses, rarely goes an entire interview without mentioning how great Coca-Cola's business is.

It is a wonder, then, why Altria Group and Philip Morris International are never mentioned in the same breath as the world's largest carbonated-soft-drink company. The two tobacco companies share so many important traits with Coca-Cola that long-term investors ought to hold all three in the same regard.

Altria Group, Philip Morris International, and Coca-Cola share similar competitive advantages
Below is a chart that compares Altria's total return (stock price appreciation plus dividends) to Coca-Cola's total return since 1993. Investors would have been much better off owning Altria over a long holding period than Coca-Cola.

A fast-growing start-up or a company in the midst of a turnaround may be able to beat Coca-Cola by this wide of margin, but you would not expect a stable cash cow like Altria to do so. Clearly, Altria creates significant value for its shareholders Hilton Gold

Coca-Cola, Altria, and Philip Morris International have a commanding lead in their respective markets. Coca-Cola's namesake beverage has a leading 17% of its market. The company's broader portfolio has a 42% share of the U.S. carbonated- soft-drink market, a 34% share of U.S. liquid-refreshment-beverages market, and a similar lead in international markets.

Altria and Philip Morris International own the leading cigarette brand -- Marlboro -- which has a commanding share of its market. Marlboro has a 42.6% share of the U.S. market, and its international market share is larger than the next two brands combined.

Altria, which manufactures and distributes Marlboro within in the United States, has a 50% share of the U.S. cigarette market and 30% of the U.S. cigar market. It also owns the two leading snuff brands -- Copenhagen and Skoal -- which combine for more than 50% U.S. market share.

Philip Morris International, the international distributor of Marlboro that was spun off from Altria in March 2008, owns seven of the top 15 international cigarette brands. Its portfolio includes Marlboro, L&M, Philip Morris, and Bond Street. According to Morningstar, Philip Morris International's brands capture a 29% share of the global cigarette market, excluding the U.S. and China.

Having a dominant market share confers significant advantages to Coca-Cola, Altria, and Philip Morris International. For soft drinks and cigarettes alike, sales are dependent on effective advertising and customer loyalty. All three companies are able to outspend competitors on advertising because of superior scale.

Meanwhile, Coca-Cola's customers demonstrate exceptional brand loyalty -- people are either Coke drinkers or Pepsi drinkers but rarely both. Consumers are literally addicted to cigarettes and show brand loyalty similar to that of Coke drinkers.

The scale advantages and customer loyalty give Coca-Cola, Altria, and Philip Morris International tremendous pricing power, as evidenced in their stable gross margins.

A stable gross-margin percentage indicates that consumers are unwilling to switch to lower-priced substitutes. A company that does not have pricing power -- that is, the ability to charge higher prices than competitors without losing customers -- would have a declining or cyclical gross margin as it constantly adapts its price to compete with other brands. That is not the case for these three companies.

In addition to pricing power, Coca-Cola, Altria, and Philip Morris International have significant economies of scale in manufacturing and distribution. Each company spreads fixed costs across a greater number of products sold than its rivals are able, thus enabling them to earn higher operating profits.

In addition, each company has an unmatched distribution network -- and bargaining power with third-party distributors -- that allows them to put their products in more stores than competitors are able; a small cigarette brand cannot secure wide distribution, so it does not get wide exposure, and therefore it cannot steal share from Marlboro. This distribution advantage protects each company's market position from competitors.

Bottom line
Coca-Cola, Altria, and Philip Morris International own leading brands that command premium prices and have unmatched distribution capabilities. Though Coca-Cola may be Warren Buffett's favorite example of a wonderful business, he could just as accurately use Altria or Philip Morris International in its place. Long-term investors should take note of the three companies' similarities and consider them equals.