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The evolving tobacco industry

Interview with Michael Szymanczyk, Chairman & CEO, Altria Group Inc. - full transcript

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Print this page by Paula C. Squires

When the CEO of Altria Group Inc. walks into a room, the former college basketball player towers over most people. At 6 feet 7 inches, Michael E. Szymanczyk attended Indiana University on a basketball scholarship. These days his schedule doesn’t permit much time for following the Big Ten. Basketball, he muses, is a sport where “most of the time you play the game with your back to the basket.”

That’s not the way he runs Altria. Since becoming chairman and CEO in March 2008, Szymanczyk has played a running game with a forward-thinking strategy that has positioned the company for growth in a new era of federal regulation. After completing a spinoff of Philip Morris International, Altria moved the corporate headquarters from New York City to Richmond. It also completed the acquisitions of cigar company John Middleton and UST Inc. UST is the holding company for United States Smokeless Tobacco Co., the largest smokeless tobacco company in the world. 

As the parent company of Philip Morris USA, Altria already commands about half of the country’s cigarette market. Such dominance helps rack up $16.8 billon in annual revenue.  Yet the company has moved into other industries.  Altria holds a 28.5 percent interest in SAB Miller — one of the world’s largest beer brewers — and, as a result of the UST deal, 100 percent ownership of Ste. Michelle Wine Estates Ltd. 

At a time when fewer people are smoking, marketing restrictions are tighter, health-related lawsuits keep coming and more states are looking to boost cigarette taxes, even the Marlboro Man might need the comfort of a good glass of wine. Yet Szymanczyk seems to take the challenges in stride.

Virginia Business: I’d like to start with Altria’s push into spitless tobacco. How is the national rollout of the new Marlboro snus product going?

Szymanczyk: There’s not much to say about it yet because it’s too early in the process. We test marketed several approaches to snus over several years to learn about it because it’s not a segment that’s been broadly known in the U.S. But obviously it’s become very popular in Sweden over the last 20 to 25 years. It represents a nice alternative for cigarette smokers.

VB: So it’s not going to be a blockbuster any time soon?

Szymanczyk: While there’ll be some initial interest, it’s quite a transition for a cigarette smoker to take that type of product. We expect we’ll see growth that will be moderate and over an extended period of time. Some people will migrate to it more easily than others will.

VB: Your company’s research shows that domestic cigarette shipment volume was down nearly 12 percent in 2009. How important is smokeless?

Szymancyzk: I think you have to look at the total tobacco space to understand what’s going on. You had a large increase in the overall pricing of tobacco predominately skewed toward cigarettes and that was due to the federal excise tax increase that took place last year. [It went up by 62 cents to $1.01
per pack.]

In general, if you look at the tobacco space over time, what you see is that it’s been relatively stable … But within that space you are seeing some movement, so cigarette consumption has declined. We didn’t see anything that we wouldn’t have predicted last year relative to the impact of the pricing change on tobacco volumes.

Smokeless tobacco and cigars have historically been growing. Smokeless tobacco has been growing quite substantially, 6 to 7 percent last year. We bought the leading positions in smokeless tobacco, so Marlboro Snus is just an addition to a larger trend. Our smokeless share is actually larger than our cigarette share. So I think the company is well positioned within that space.

The cigar business tends to show 3 to 4 percent growth. That’s a business where we have about a third of the market share. We also have an excellent brand. So the company’s gone from being a cigarette business to being a total tobacco space business and an alcohol business.

VB: Now that tobacco is regulated by the Food and Drug Administration (FDA), what does this mean for marketing new products such as smokeless tobacco?
Szymanczyk: Marketing of these kinds of products is always evolving. It’s just an evolutionary process. The way that we market today is very much one-to-one, relationship marketing. We don’t run magazine advertising, for example. All other types of outdoor advertising that existed prior to the master settlement agreement are gone. The focus today is one-on-one engagement — direct mail to adult tobacco users that are 21 years or older and other adult events. I don’t think that the FDA changes a whole lot of what we do. A lot remains to be sorted out.

The Master Settlement Agreement [in 1998] was the profound set of changes. It came after the ‘96 rules that were in the original proposed FDA legislation. The MSA accommodated a lot of those restrictions and then went into force, so now we have FDA legislation with an inclusion of that ‘96 rule some years later, so a lot was already accomplished there prior to the passage of the legislation.

VB: Some public health professionals believe that smokeless tobacco is less hazardous than cigarettes. In documents submitted to the FDA, it appears that Altria would like to position these products that way. 

Szymanczyk: What I would say is that we’ve submitted … because the FDA raised this subject. Part of the process with the FDA is that you make submissions, and other people made submissions similar to ours.

There is a significant body of science in the public health community that would demonstrate a different risk level between smokeless tobacco and cigarette smoking. Our view is that the FDA needs to look at the subject and provide guidance.

For us, it’s mostly a matter of the FDA making a determination of what’s really appropriate and what should be done in that regard. And we’re waiting to hear from them.

VB: If they don’t agree that smokeless is less hazardous, would that change the marketing strategy?

Szymanczyk: I don’t think that we’ve ever proposed that we should market those products that way. We haven’t positioned any of our smokeless products on anything other than flavor. I don’t think that’s the relevant subject. I think the relevant subject is what’s the appropriate information for manufacturers to provide for consumers relative to these projects. There’s a distinction between marketing products on a benefit platform and providing accurate information to consumers. 

VB: In a document submitted to the FDA, Altria states that since 2001 many experts have concluded that “using smokeless tobacco products is undeniably far less hazardous than smoking cigarettes. While debate continues over how publicizing that finding would impact public health, the finding itself is now beyond any credible dispute.”

Szymanczyk: That’s just a statement of the publically available science that people that said about it. So the question is, what do you do about that? That information exists. It’s one of the reasons why we thought it would be appropriate for the FDA, who can examine the scientific information and make raw conclusions about what could be appropriate. You can see the issue with science. If you have a scientist who draws a conclusion and then various entities go and interpret that science and make various decisions about what to tell consumers,that could cause some level of confusion among consumers. I think in this particular case it’s useful to have the regulatory body study the subject and make the determination of what is appropriate and establish the guidelines … what warning labels need to be applied, what other information needs to be applied.

VB: Tell us about the role of the new research center in Richmond and the work going on there?

Szymanczyk: The Center for Research and Technology was an investment the company made because it recognized as it went forward that it was going to have to move toward traditional consumer packaged goods — an R&D operation versus what had really been a very historically focused cigarette product development. … In the middle of that we spun off PMI [Phillip Morris International] and the R&D work we did for PMI went away as well, so we had to reconfigure the work of the organization as part of that process.  It’s working on multiple categories.  I’m not going to get into the things that they’re working on because that would be proprietary. We have 60 million consumers that I think we have a good understanding of,  and our objective is to understand the insights into them to provide them with the products they enjoy and are interested in buying.

VB: How many people work there?

Szymanczyk: Just under 600 people work there. 

VB: Many states may raise cigarette taxes as a way to close budget gaps. What impact could this have on Altria? 

Szymanczyk: Well you know, tax increases are kind of a regular part of the business. We tend to see some increased level of excise tax activity when state budgets get under duress. That’s not a new thing. It does negatively impact volume — particularly cigarette volume — and so the net effect of that is lost business. We produce less. There are fewer jobs available in the cigarette factories. We’ve seen that occur over a number of years. We’ve closed several facilities over time as volume has declined … It tends to become more so when we have a recessionary environment and state budgets are under strain. 

VB: Some Virginia legislators have said they would support a boost in the state’s cigarette tax to fund transportation improvements. How do you feel about that?

Szymanczyk: In general, cigarette taxes have gone up over time. They went up a few years ago in Virginia, quite substantially from where they were [from 2.5 to 20 cents a pack in 2004 and then to 30 cents a pack in 2005]. Excise taxes, as a rule, are certainly high enough. They don’t need to go up on a regular basis. They certainly don’t need to be the sole purpose of funding state activities because they are concentrated on a relatively small group of people, and that tends to be repressive. They shouldn’t always be singled out as the place to go get money.

VB: Since relocating Altria’s headquarters from New York City to Richmond, how would you assess Virginia’s corporate climate?

Szymanczyk:  I think Virginia is an excellent state to do business, and I think that the outcome for our organization is very positive. The community is very welcoming. It’s an attractive place to live, and I think we have a state government that’s interested in making sure Virginia is an attractive place for business to come.

VB: Tell us about some of the Virginia boards you serve on and your role in Altria’s philanthropic efforts?

Szymanczyk: The one that commands the most time is serving as a trustee for the University of Richmond. I find that to be interesting. I find education to be a place in general that is important for the future development of the country. A lot of the things I’m involved with are education centered. I have quite a bit of involvement with my alma mater - Indiana University. I serve on the Richmond Performing Arts Center board, and I think that a number of the participants on that board and the board itself did a terrific job of giving the city a new performing arts center that’s quite spectacular … I continue to serve on the UNCF (United Negro College Fund), which is a national board, again focused on education. 

VB: Altria continues to be sued by consumers over health-related problems. To wrap up, what’s the biggest challenge in being the CEO of America’s largest cigarette company? 

Syzmanczyk: This is a business that has lots of different arenas and stakeholders. It’s got social, political, economic, and consumer and employee issues and government issues that are all interwoven together. So it does make it complex, but the complexity makes it interesting and challenging …
It’s a business, given the health issues related to the products, that has to be run responsibly. I think that the people in this organization are acutely aware of that and work very hard to do that. That’s really something that’s subject to scrutiny and other people’s judgment. We are always in the spotlight. When you look in from the outside you say, “Geez, these guys must get up in the morning and say, ‘Woe is me.’ ” But in the end that is the nature of the business — litigation and regulation and competition. Those are the things that make up the business. So if you want to have lots to deal with, then it’s a very interesting business to be in. 

VB: When you came, you said you wanted to change things up. One of the goals in Altria’s mission statement is to align with society. What other things do you want to accomplish as a CEO?

Szymanczyk: I became CEO of Philip Morris USA back in 1997, so essentially this company I’ve run for a long time. We put Phillip Morris’ mission in place after the Master Settlement Agreement. More recently, we’ve broadened the base of business of the company. It’s really spun out of these other businesses it was in that were less collected like the food business or the international cigarette business. It was totally separate. . .We really reshaped the company into something else. Now that we’ve done that we have to run it, and we have to run that in the context of an FDA regulated environment

We do have a new regulator, and we have to see how that evolves, and there’s work to do done, but I haven’t found that things plateau. In my time I’ve found that there’s an evolutionary process always taking place. If you think that you’ve got it where you want it, it’s probably moved past you. So we’re always trying to look out in front of things and determine where we want to go next, and what we need to do to accomplish what the primary responsibility is — which is to serve the interest of our shareholders.

I don’t look at it from the perspective of what I want to do. I look at it from the perspective of what needs to be done next? We are constantly examining the environment we’re in and what insights can be gained. What’s going on around us, the kinds of things we need to think about, what we need to do next. It’s not very much about me. 

It’s about what’s happening around us, and where we think we need to take the company.

VB: When you came, you said you wanted to change things up. One of the goals in Altria’s mission statement is to align with society. What other things do you want to accomplish as a CEO?

Szymanczyk: I became CEO of Philip Morris USA back in 1997, so essentially this company I’ve run for a long time. We put Phillip Morris’ mission in place after the Master Settlement Agreement. More recently we’ve broadened the base of business of the company. It’s really spun out of these other businesses it was in that were less collected like the food business or the international cigarette business. It was totally separate. . .
We really reshaped the company into something else. Now that we’ve done that we have to run it, and we have to run that in the context of an FDA regulated environment

We do have a new regulator, and we have to see how that evolves and there’s work to do done, but I haven’t found that things plateau. In my time I’ve found that there’s an evolutionary process always taking place that if you think that you’ve got it where you want it, it’s probably moved past you. So we’re always trying to look out in front of things and determine where we want to go next, and what we need to do to accomplish what the primary responsibility is, which is to serve the interest of our shareholders.

I don’t look at it from the perspective of what I want to do. I look at it from the perspective of what needs to be done next? Wearer constantly examining the environment we’re in and what insights can be gained. What’s going on around us, the kinds of things we need to think about, what we need to do next. It’s not very much about me. It’s about what’s happening around us, and where we think we need to take the company.


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