It is certainly no secret that demographics play key roles in companies’ marketing strategies.
Demographics in general are important. Certain products are meant to appeal to specific groups; if they happen to attract consumers from untargeted groups, that is a happy albeit coincidental byproduct for the company.
Some groups, though, are always crucial in marketing plans, regardless of the nature of the product. One such group is young consumers, typically those under 30 years of age. They are important because they tend to have a higher share of discretionary income than many of their elders, and they represent a potentially long-term customer base. If a young customer is pleased with a product, that customer has the potential to be a customer for life. Given modern life expectancies, that could mean loyal customers for 40 years or more.
A recent Gallup Poll had bad news for tobacco companies, though. Those companies have lost ground with the youth demographic in the last decade. In the early 2000s, young Americans (aged 18 to 29) were much more likely to smoke cigarettes than Americans over the age of 30, but the smoking rate for young Americans has dropped 12 percentage points in the last 10 years.
Smoking rates in general have been declining for decades. In recent years, the drop in the smoking rate has been accompanied by an equivalent increase in the use of ecigarettes, and studies suggest young Americans are the most likely of the age groups to use them.
From a health perspective, all this is good news. “Cigarette smoking is the leading cause of preventable disease and death in the United States,” the Centers for Disease Control and Prevention (CDC) reports, “accounting for more than 480,000 deaths every year, or one of every five deaths.” About 16 million Americans live with a smoking-related disease.
From a business perspective, though, it is bad news.
Several factors are thought to be behind this trend among young consumers – antismoking campaigns could be having an effect, and government regulations and higher taxes could be serving as barriers between cigarettes and young consumers. Public smoking bans make smoking less convenient as well, and ecigarettes are proving to be popular alternatives for an age group that is known for its tendencies to experiment and to use multiple forms of tobacco.
The CDC offered tobacco companies little hope for future customer growth among young consumers with a report released in April 2015 that indicated cigarette consumption has been declining among middle school and high school students. Those are the age groups largely believed to be the starting points for most smoking habits.
In the wake of that 12-percentage point drop that Gallup reported last month, young Americans now are no more likely to smoke than Americans over the age of 30.
Ecigarettes represent an intriguing shift in tobacco company marketing. As tobacco use among young Americans has dropped, “vaping” has increased almost proportionately. More and more, tobacco companies are diversifying their product offerings to include ecigarettes or similar products.
Ecigarettes are still emerging in the marketplace, though. They are not regulated by the FDA, and the American Lung Association warns that "there still is a lot we do not know about ecigarettes. Initial tests have found ecigarettes contain varying levels of the addictive substance nicotine as well as cancer-causing chemicals, such as formaldehyde."
In the third quarter, between the CDC’s report and the publication of the Gallup Poll, many gurus reduced their tobacco stakes. In fact, three-fourths of the gurus’ third-quarter activity in tobacco stocks involved cutting existing stakes. A few added to them, but no gurus bought new tobacco stakes in the third quarter.
Three gurus added to their stakes in Reynolds American Inc. (RAI, Financial), the second-largest tobacco company in the U.S., in the third quarter. Reynolds’ cigarette brands include Newport, Camel, Pall Mall and Kent.
Headquartered in Winston-Salem, North Carolina, Reynolds finalized a deal for Lorillard Tobacco Company, including its ecigarette brands, in July 2014.
Reynolds American was the only tobacco company that fared well among the gurus in the third quarter. Lee Ainslie (Trades, Portfolio) increased his stake in Reynolds American by more than 2,183%. Joel Greenblatt (Trades, Portfolio) increased his stake in Reynolds American by nearly 83% while David Dreman (Trades, Portfolio) boosted his stake by more than 59%.
Reynolds American sold for $47.23 per share Thursday.
Five gurus reduced their stakes in Altria Group Inc. (MO, Financial), the Henrico County, Virginia-based parent company of Philip Morris USA. Its cigarette brands include Marlboro, Benson & Hedges, Merit, Parliament and Virginia Slims.
Greenblatt, First Eagle Investment (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and James Barrow (Trades, Portfolio) reduced their stakes in the third quarter. Barrow sold more than 97% of his stake, Dalio sold nearly 86% of his, and First Eagle Investment (Trades, Portfolio) reduced its stake by more than 38%.
Altria owns an electronic cigarette brand called MarkTen.
Altria Group sold for $58.14 per share Thursday.
Philip Morris International Inc. (PM, Financial), a global tobacco company based in Lausanne, Switzerland, also saw five gurus reduce their holdings in the third quarter. Philip Morris International markets Marlboro, as well as other brands, outside the U.S.
First Eagle Investment (Trades, Portfolio) trimmed its stake by more than 36%, but the other gurus – Tweedy Browne (Trades, Portfolio), Barrow, Ruane Cunniff (Trades, Portfolio) and Charles Brandes (Trades, Portfolio) – made more modest reductions. Greenblatt increased his stake by more than 344%.
Philip Morris International sold for $87.25 per share Thursday.
London-based British American Tobacco PLC (BTI, Financial), one of the largest tobacco companies in the world, saw Greenblatt sell more than 36% of his stake, but Brandes increased his stake in the company by more than 9%.
British American Tobacco’s top-selling cigarette brands are Dunhill and Lucky Strike. Through its subsidiary, Nicoventures Limited, British American Tobacco licensed a nicotine delivery system inspired by asthma inhaler technology from Kind Consumer Limited, a London-based health care company.
British American Tobacco also launched its Vype brand electronic cigarette in 2013.
British American Tobacco sold for $106.12 per share Thursday.
Three gurus – George Soros (Trades, Portfolio), Donald Smith (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) – reduced their stakes in Alliance One International Inc. (AOI, Financial), a Morrisville, North Carolina-based wholesaler and distributor of tobacco.
Alliance One International sold for $11.75 per share Thursday.
Barrow reduced his stake in Imperial Tobacco Group PLC (ITYBY, Financial), a Bristol, United Kingdom-based cigarette company, the fourth-largest cigarette company in the world.
Imperial Tobacco sold for $102.42 per share Thursday.
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