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According to its website, the Nu Mark subsidiary of Altria (MO) is focused on "responsibly developing and marketing innovative tobacco products for adult tobacco consumers." To this end, the company is testing a product called VERVE, a chewable cellulose disc impregnated with nicotine that looks something like a stretched out guitar pick. The nicotine in the disk is derived from tobacco.

Consumers are supposed to put the chip in their mouth, chew on the mint flavored disk, and then spit it out when done. This product is different from other oral products in that it does not require spitting throughout the consumption process. The 1.5 mg of nicotine in a disk is less than most other nicotine products, such as cigarettes, snuff, and snus.

Nu Mark is testing VERVE in Virginia to gauge market acceptance, and plans to use direct mail and in-store advertising to promote it. The new product is meant to appeal to tobacco users looking for a “spit-free” alternative to cigarettes. Each child-resistant package will have 16 VERVE tabs and be marked “Keep Out of the Reach of Children.” VERVE is being manufactured in Richmond, Virginia.

Altria isn't exactly entering a new market with VERVE, since it already sells smokeless tobacco products. That said, this is a novel delivery method that removed tobacco from the equation, which may allow the company to avoid some of the harsh, legally-required warnings that most of its other products must contain. That said, nicotine is still considered an addictive and hazardous substance, so warnings of some kind will clearly be on the packaging--the extent of the warnings is the point of discussion.

Clearly VERVE isn't going to move the needle for a company as large as Altria. Nor will it eat materially into the company's $21.4 billion in cigarette sales, as of year-end 2011. If VERVE finds a market, the most likely outcome is that it will cannibalize the $1.6 billion in sales of smokeless products the company sold last year. It would likely also pull sales from competitors' smokeless products and nicotine gum, which has the reputation of tasting bad.

The really interesting aspect of VERVE, however, is that it marks the second move by a large tobacco company away from tobacco-based delivery methods. Only a month ago, Lorillard (LO) announced its intention to purchase blu ecigs for $135 million in cash. Blu ecigs is a leading maker of so-called e-cigarettes, which are cigarette-shaped electronic devices that heat a liquid to deliver nicotine.

Since e-cigarettes maintain most of the emotional, social, and physical aspects of smoking a cigarette, they are more likely to enjoy broad market acceptance. Moreover, Lorillard's marketing and distribution machine should be able to integrate blu ecigs' products without difficulty since they are serving a growing market niche. In these respects, the acquisition is less risky than Altria's VERVE test. The initial price point for the electronic device, however, is a stumbling block at $70 on the low end.

Lorillard’s need for a new product is greater than that of Altria. While tobacco in general has been under legal and regulatory scrutiny for many years, menthol and other flavored cigarettes have become a major target. Since Lorillard derives a large amount of revenue from this category, purchasing blu ecigs was both bold and, likely, necessary.

These moves show that there is an important shift taking shape in the tobacco industry. The major players are obviously well aware that their main product line is slowly dying and that they must find alternatives. This is a delicate balancing act based on the negative view of tobacco in The United States. This perception is also slowly spreading across the globe. Finding non-tobacco nicotine products seems like a good direction.

Investors who don't mind owning these "sin" stocks, should take heart in the fact that the companies are looking to extend their cash cow businesses and aren't simply content to bleed them to death. These aren't game changing initiatives, but they are legitimate efforts to ensure long-term survival. Copycat products of the most successful experiments are likely to show up across the industry, so more than just the initiating company is likely to benefit from these efforts.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.