This paper examines the Altria Group's corporate strategy, focusing on its level of diversification, international operations, and recent strategic decisions. It explores how Altria divested Kraft Foods and spun off Philip Morris International to concentrate resources on the domestic U.S. tobacco market. The paper assesses the business logic behind this refocusing strategy, evaluates how well Altria's decisions align with that logic, and offers recommendations for top management. Key topics include the MillerCoors joint venture, the role of Philip Morris Capital Corporation, rising legislative and social pressures on tobacco, and the long-term viability of a domestically focused tobacco business model.
The Altria Group is the parent company of the well-known tobacco giants Philip Morris and John Middleton. Altria also holds an 8.5% economic interest in SABMiller, the world's second-largest brewing company ("Our Companies and Their Brands," 2008, Altria). Philip Morris alone dominates approximately half of the American tobacco market. However, in terms of diversification, although Altria's companies have strong brand loyalty, Altria is not particularly diversified as an entity. In fact, Altria has grown less diversified in recent years. In 2007, Altria divested itself of its shares in Kraft Foods, the snack food company in which it once held a considerable interest. In 2008, Altria's Board of Directors authorized the spin-off of 100% of the shares of Philip Morris International Inc., Altria's international division ("Corporate Restructuring," 2008, Altria).
Instead, Altria has shifted its focus away from snack products like Kraft and its international potential, intent upon growing — or, as its literature insists, maintaining — its base of domestic smokers. According to its most recent press release at the time, following the sale of Kraft and the divestiture of Philip Morris International Inc., Altria "now has greater focus, with most of our corporate resources directed toward building our leadership position in the U.S. tobacco industry. The U.S. tobacco industry remains one of the largest and most profitable markets in the world, and has additional growth opportunities for Altria Group. Altria Group will have the ability to leverage resources, such as Philip Morris USA's distribution network and strong field sales force, across an array of tobacco products including acquisitions like John Middleton. Altria Group will also have a more flexible capital structure" ("Strategy for Financial Growth," 2008, Altria).
Despite the sale of Kraft and the spin-off of its international branch, Altria continues to maintain an international presence through both SABMiller and Philip Morris Capital Corporation, a subsidiary owned by the Altria Group. "The company's portfolio consists primarily of leveraged and direct finance lease investments leased to predominantly investment-grade credits. The portfolio of assets of Philip Morris Capital generates operating companies' income, cash flow, and tax deferral status for Altria" ("Philip Morris Capital Corporation," 2008, Altria). Although one might expect the international market to be a better source for generating new tobacco users, Altria has turned its manufacturing focus toward the domestic arena — where its most loyal brand users reside — while still maintaining an international financial presence to ensure sustained cash flow.
The revenue of the tobacco industry has been hard hit by recent legislative developments, including the banning of smoking in restaurants in New York City and many other major urban areas. Cigarette taxes have risen in many states, and coupled with the economic downturn and growing social pressures, many Americans are seeking to quit smoking. The tobacco industry continues to receive negative publicity for its marketing efforts aimed at teenagers, as well as for the broader personal and public-policy consequences of tobacco addiction. These pressures could prove problematic for Altria's strategy of focusing on its domestic market to ensure a strong revenue base while reducing overall operating costs.
The tobacco industry has also faced recent scrutiny following the discovery that a "reanalysis of nicotine yield from major brand-name cigarettes sold in Massachusetts from 1997 to 2005 has confirmed that manufacturers have steadily increased the levels of this agent in cigarettes. This independent analysis, based on data submitted to the Massachusetts Department of Public Health by the manufacturers, found that increases in smoke nicotine yield per cigarette averaged 1.6% each year, or about 11% over a seven-year period" (Herman, 2007).
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