Altria's latest earnings call was dominated by discussions of the illicit vape market, the menthol ban, and the company's smoke-free ambitions. But hidden within the detailed analysis of on!, Altria's burgeoning oral nicotine pouch brand, lies a potential strategic misstep: a dramatic increase in retail price.

On the surface, the numbers seem to paint a picture of robust success. Helix, the subsidiary behind on!, grew reported shipment volume to a staggering 33 million cans during the first quarter, a 32% surge. on! itself carved out an even bigger slice of the oral tobacco pie, growing its share by 0.7 share points to a respectable 7.1%. All of this, the company proudly proclaimed, was achieved alongside a 26% increase in on!'s retail price.

While such figures might inspire confidence in the brand's strength and consumer loyalty, a deeper dive into the dynamics of the oral nicotine pouch market suggests a more cautious outlook. This dramatic price hike, coupled with several key market trends, raises the question: is Altria pushing the limits of consumer tolerance, potentially setting the stage for a future on! share erosion?

The oral nicotine pouch market, while experiencing impressive growth, is becoming increasingly crowded and competitive. Swedish Match, with its popular ZYN brand, has emerged as a formidable player, aggressively vying for market dominance. Recent data from PMI indicates ZYN holds a 28% share of the total oral tobacco market, showcasing an 80% year-on-year growth. This rapid ascent of ZYN raises concerns about Altria's ability to maintain on!'s momentum, especially given the widening price gap between the two brands.

on! vs. ZYN: A Pricing Tale

Let's break down the numbers. Altria's data suggests that the average retail price of on! in Q1 2024 was $3.47, compared to $3.77 in Q4 2023. While this appears to be a decline, it masks the 26% increase in retail price on a year-over-year basis. ZYN, meanwhile, has maintained a more consistent pricing strategy, relying on its extensive distribution network and promotional activities to drive volume growth.

This disparity in pricing strategy could become a critical vulnerability for Altria. As consumers face ongoing economic pressures, price sensitivity is likely to remain a significant factor in purchase decisions. While Altria claims on! has seen a 30% increase in repeat purchases, this is based on a period prior to the most recent price hike. It remains to be seen if such loyalty will persist as the price gap between on! and ZYN widens.

Altria's justification for the on! price increase lies in its "analytics and revenue growth management capabilities." The company believes it can leverage data and targeted promotions to maintain consumer engagement while optimizing profitability. However, this strategy hinges on a delicate balance. Overly aggressive pricing risks alienating price-sensitive consumers, potentially pushing them towards more affordable alternatives like ZYN.

A Potential Scenario: The Cigarette Exodus

Here's a potential scenario: Assume the current trend of a 9% decline in industry cigarette volumes continues throughout 2024. If a significant portion of this decline is driven by smokers transitioning to oral nicotine pouches, Altria's on! brand is well-positioned to benefit. However, if price sensitivity leads a substantial number of those transitioning smokers to opt for the more affordable ZYN, Altria could face a significant erosion in on!'s market share, impacting the company's overall growth trajectory.

The on! PLUS Wild Card

It's worth noting that Altria is not oblivious to the competitive landscape. The company is actively preparing for the launch of on! PLUS, a new product with a long-lasting flavor system and a softer material, which it believes will differentiate the brand and drive future growth. However, on! PLUS is still awaiting FDA authorization, and its success is far from guaranteed.

Conclusion: A Risky Bet?

In the meantime, Altria's aggressive on! pricing strategy could be a gamble that backfires. The company may be overestimating consumer loyalty and underestimating the appeal of more affordable alternatives in a market increasingly driven by price sensitivity. While the oral nicotine pouch market holds tremendous promise, Altria's path to dominance is fraught with challenges, and the company's current pricing strategy might be inadvertently laying the groundwork for a future share decline.

"Fun Fact: Altria's iconic Marlboro brand, while still dominating the U.S. cigarette market, actually originated as a brand marketed to women with the slogan "Mild as May.""