Following the customer
Tobacco executive says product preferences ‘continue to evolve’
- April 29, 2014
The volume of cigarettes sold in the U.S. is declining 3 to 4 percent a year, but their manufacture remains a highly profitable business for Henrico County-based Altria Group Inc.
The man in charge of that business and Altria’s cigar subsidiary John Middleton Co. is Clifford B. Fleet, the president and CEO of Philip Morris USA Inc. Fleet was promoted to the position in November, succeeding William F. Gifford Jr., who is now Altria’s senior vice president, strategy and business development.
Fleet previously was vice president and general manager of Marlboro, the iconic Philip Morris brand, which has nearly 44 percent of the cigarette market.
“Cigarette sales have been declining in the United States for literally decades,” Fleet says. “This is not something that is unfamiliar to us. It’s kind of embedded into how we run the company … Essentially what it means is you have to reduce your cost structure, get your infrastructure in line with those volume declines, while also pricing as appropriate to continue to grow profits.”
Fleet also notes the product preferences of adult tobacco consumers “continue to evolve.”
“While cigarette sales are declining, you’re seeing growth in smokeless tobacco products, about 5 percent a year, which is one of the fastest-growing consumer package goods categories that are out there,” he says. “We’re also seeing a lot of interest in other products such as e-cigarettes. And so what we’re doing in Altria… is figuring out how to serve those needs.”
Fleet, 44, grew up in Charlottesville and attended the College of William & Mary where he earned a bachelor’s degree in business, a master’s in history and a law degree.
During his career at Altria, he has held positions in business development, investor relations, sales, operations, market information and finance. Away from the office, he serves on the Jamestown-Yorktown Foundation board.
While managing Marlboro, Fleet implemented a new brand architecture that divided the brand into four “flavor families” — Red, Gold, Green and Black — with each having a distinct promotional campaign. Martin Barrington, Altria’s CEO, credits the move with helping Marlboro to continue gaining market share while broadening its appeal to young adult smokers, ages 21 to 29.
Altria’s tobacco products are sold by hundreds of thousands of retailers, primarily in convenience stores.
One national retailer, Rhode Island-based CVS Caremark Corp., recently decided it would stop selling tobacco by October at its more than 7,600 stores. “Cigarettes and tobacco products have no place in a setting where health care is delivered. This is the right thing to do,” the company said in a statement.
Tobacco products represent $2 billion in annual sales for CVS, about 3 percent of overall sales.
“We respect their decision to go in a different direction,” says Fleet, who chalks up the move as “part of the normal comings and goings of a capitalistic system.”
In 2013, Altria’s “smokeable” products (cigarettes and cigars) represented about 84 percent of its total operating company income of $8.4 billion.
Philip Morris USA’s 1.6 million-square-foot manufacturing facility in South Richmond produced 129 billion cigarettes last year, slightly more than half of all cigarettes sold in the country.
The facility is the company’s sole cigarette plant. Altria recently sold for $68.5 million a North Carolina factory it closed in 2009. That property includes 3.5 million square feet of space, including the factory, warehouses and a utility plant.
(Philip Morris USA doesn’t make or market MarkTen, Altria’s electronic cigarette. That product is being handled by another Altria subsidiary, Nu Mark LLC. )
Virginia Business interviewed Fleet at the Richmond manufacturing facility, where high-tech machines can produce 20,000 cigarettes a minute.
Virginia Business: What has been Philip Morris USA’s reaction to the decision by CVS to stop selling tobacco products?
Fleet: First of all, we’ve had a longstanding and good relationship with CVS as they have chosen to sell our products to adult consumers over the years. We respect their decision to go in a different direction.
There are hundreds of thousands of stores that sell cigarettes in the United States, and we work with all of those stores to help them build their businesses and serve the customers they want to serve. Quite frankly, people make different business decisions all the time about the directions they go, and we’ve had certain people who have chosen to not sell tobacco products and other people who have chosen to add tobacco products to their portfolio. I think that’s part of the normal comings and goings of a capitalistic system.
VB: How does the company plan to maintain its current profit levels as cigarette sales nationally decline?
Fleet: Cigarette sales have been declining in the United States for literally decades. This is not something that is unfamiliar to us. It’s kind of embedded into how we run the company … Essentially what it means is you have to reduce your cost structure, get your infrastructure in line with those volume declines, while also pricing as appropriate to continue to grow profits.
I think one of the things we’re happy with is that the model seems to be working. Profit pools for [tobacco product] manufacturers continue to grow, and we’re able to reward our shareholders, keep our company strong and make sure we maintain a vital presence in the community as that happens….
I think what we need to do, though, is frame Philip Morris in the context of the broader Altria family of companies. There are 40 to 45 million adult cigarette consumers in the United States. What we’ve seen is that their preferences for products continue to evolve. While cigarette sales are declining, you’re seeing growth in smokeless tobacco products, about 5 percent a year, which is one of the fastest-growing consumer package goods categories that is out there.
We’re also seeing a lot of interest in other products such as e-cigarettes. And so what we’re doing in Altria — this is being done partially through PM USA and partially through other operating companies — is figuring out how to serve those needs. And those represent, in addition to cigarettes, some potential opportunities for us to continue to grow our profits. That has been the model for some time. It has been successful, and we think it will continue to be successful.
VB: With all the dynamics going on within the cigarette industry, how does the Marlboro brand continue to grow?
Fleet: We are stewards of one of the finest brands that has ever been created in the world. Its essence and its values, I think, continue to resonate very powerfully among consumers today, not only in the United States, but also Marlboro is a very strong brand overseas. We don’t own that brand overseas anymore; that’s now owned by Philip Morris International, but it continues to do very well there.
What we want to do is make sure we’re good stewards of that brand. We continue to invest in that brand because we want to make sure it maintains a strong position for people who come after us. That is at the very core of what Philip Morris USA is.
VB: Does PM USA expect a significant percentage of its cigarette customers to switch to electronic cigarettes?
Fleet: I think it’s a bit premature to be making predictions about how many consumers will [switch] … What we, meaning the Altria family of companies, know about e-cigarettes and their trial … is that adult smokers are aware of them. Many of them have tried them. But adoption rates are pretty low at this point in time, which would indicate that there is interest, but probably the products are not meeting the needs of people today. That’s a challenge that I think we and other people in the space are struggling with and dealing with.
But clearly there is some interest there. I think it’s prudent of Altria to go and invest some money there and see what we can learn. Then if it turns into a business that grows like some people have predicted, then we want to make sure we’re a leader in that business because we want to be leaders in all the businesses that are meeting the needs of adult tobacco customers.
VB: Based on your experience with Marlboro, what advantage does Altria enjoy over its other rivals in building a brand like MarkTen?
Fleet: We are very blessed to have some terrific brands here … What we are essentially at our core is a company that manufactures products that are sold as premium brands. That philosophy, or that DNA, I think is very much embedded in the company.
The terrific brands we have — Marlboro, Copenhagen, Skoal, Black and Mild [cigars], in addition to the wonderful brands we have through our [Ste. Michelle Wine Estates] interest — we really enjoy building those brands and working on those brands and making sure we add value for adult consumers.
Now building a brand is something we’re obviously very good at or that we try to be very good at because we’ve done it for many years. But starting a brand from scratch is a bit of a different exercise. Nu Mark is working its way through that, but we’re very optimistic about the company’s abilities to build a brand in this space, too, that will be just as prominent.
What we know is that the category is really early. Consumers are not particularly loyal to one brand or one product at this point in time. They’re still searching for what will be their thing, and that gives Nu Mark a great opportunity to come in there and build a value equation that’s appropriate. What you have to do, when you build a brand, is create an aspirational, emotional connection point that the adult consumer can gravitate towards. That’s what we’ve done to make our other brands successful, and that’s what … Nu Mark will try to do.
VB: Will there ever be a Marlboro e-cigarette?
Fleet: You never say never, but there are some hurdles that would have to be worked through before we get there. I’m afraid that’s a very complicated [question].
VB: What sort of obstacles to growth are there in this kind of a new category, new brand, including FDA regulation?
Fleet: FDA regulation, if and when it comes, certainly will play a role in shaping how this e-vapor category plays itself out. And one scenario could be that the category is indeed limited in its size, and another scenario would be that people posit that e-cigarettes or e-vapor products indeed could reduce the risk associated with [tobacco use]. And it’s going to have to be some very thoughtful debate on that. But it’s still very, very early, though. And I think people are still struggling to figure out exactly how e-vapor could play a role in reducing the harm associated with tobacco use. Editor's note: After this interview, the FDA announced in late April its first proposed regulations for the industry, including a ban on sales to minors, the disclosure of e-cigarette ingredients and the placement of labels warning that nicotine can be addictive.
VB: Are there plans for changes in the employment level, not only Philip Morris USA but also Altria, in Virginia?
Fleet: We’re very proud of the relationship and the role that we play in Virginia. It’s a terrific state. It’s a wonderful place to do business. Our employees love working here. When we moved all these people down from New York [after the headquarters of Altria and Philip Morris USA relocated to Henrico County], I think a lot of people didn’t know what to expect, and what I hear consistently is, “Wow, I couldn’t imagine myself going back. It’s a pretty special place to be.” And we’re really, really happy with that.
Future employment is always a bit difficult to project. Certainly in the cigarette space we have reduced our infrastructure as volumes have declined. And that’s part of a business model and things that we do.
What we don’t know is how much of the new revenue streams and new opportunities that we continue to explore might add future additional opportunities that could be available to us. Given our long-standing relationship and deep ties to this area, we’re always looking for ways that we can better leverage what is a terrific footprint and a base not only for employees but also suppliers and other people in the community that support us, because it’s a wonderful place to do business.
VB: How does Philip Morris recruit and maintain the skilled workforce?
Fleet: We’re always seeking the best and the brightest people to join our workforce. We need a really diverse set of skills. For example, to run the manufacturing center, you need skilled engineers to help you do that. What we do here is very automated, very high-tech, very high-speed, so you really need smart engineering grads to do that. And [in] the marketing organizations, we want to make sure that we have sharp, creative minds who can help us work in those spaces. Obviously we want finance professionals and other areas like that to help us.
What we have done is build a recruiting process that not only taps into what is already a very strong base of what we call experienced hires, but we’ve got some great relationships with some of the wonderful schools here in the commonwealth that turn out just top-notch graduates, whether it’s engineers, or marketing professionals, or finance professionals, or other areas like that. Those relationships have been absolutely critical to us bringing on the talented people we need to keep the business going strong. I can’t say enough about the wonderful schools we have here in Virginia. It really is a huge benefit to us as we work on our employee base.
VB: Is recruitment a problem as far as people being reluctant to work for a tobacco company?
Fleet: I wouldn’t say that’s an issue we’ve had. We’re recruiting in Virginia and also some other select schools outside of Virginia. We’ve built some long-standing relationships. I think those relationships have helped people see the company and get comfortable with the business and what we do and realize that we operate with what we believe is a great deal of integrity in what can be a business that has its challenges.
The story you like to tell, and I believe this to be absolutely true, is that: Don’t you want to work somewhere where the issues are really hard? And you get to work on only really interesting stuff that has problems that if you were able to help solve them really can help make a difference. I find that to be a great challenge every day, and it also keeps the job very, very interesting and very exciting.
VB: I was intrigued [in a recent presentation by Altria CEO Martin Barrington] that you looked at the prospects for the economy in deciding your promotions and things like that. How does that work?
Fleet: There are a variety of things that we look at that are important for us to understand … Because you always have to stay close to your consumer and … make sure you remain sensitive to what is going on with them. The things like unemployment rates are important. Economic consumer confidence is important. Housing starts are important. We look at the mix of all of those things. And you can look at those things not only at a national level but also at different geographies. That helps shape how we need to best support and deal with adult tobacco consumers as they go through those economic situations … We need to make sure that we remain cognizant of those macro environmental issues as we run the company.