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Juul plans to use its new link to the maker of Marlboros to market directly to smokers — and even advertise in cigarette packs (MO)

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  • In a recent $13 billion deal, Altria, the company behind Marlboro cigarettes, acquired a 35% stake in e-cigarette startup Juul Labs.
  • The deal is expected to extend the reach of both companies. Juul gets to market to cigarette smokers and Altria gets access to the standout e-cig brand.
  • As part of the partnership, Juul plans to advertise with inserts placed inside Marlboro packaging.
  • But the Juul-Altria deal also comes with risks, according to Morgan Stanley analysts.

Open up a pack of Marlboros and you might soon find an ad for a Juul.

As part of a recent $13 billion Deal, Altria, the company behind Marlboro cigarettes, acquired a 35% stake in e-cigarette startup whose uniquely powerful devices have been credited with singlehandedly reviving the vaping market.

The deal is expected to extend both companies' reach: while Altria gets to protect its bottom line as people increasingly turn to vaping instead of smoking, Juul gains access to hundreds of thousands of customers looking to switch. (It's still unclear whether e-cigarettes help adults quit smoking, but some early research is beginning to suggest they might.)

But the Juul-Altria partnership also comes with risks, according to Morgan Stanley analysts.

In a recent research note that comes on the heels of a meeting between the analysts and Juul representatives, the analysts describe those risks. They also share details about how Juul and Altria plan to protect their bottom lines.

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For its part, Altria will gradually take on a stronger role in shaping Juul's future as it transitions from a non-voting observational role to a voting role with more of a presence on the startup's advisory board.

Juul, meanwhile, will gain access to shelf space at thousands of retailers around the country. It will also get a direct line to potential future customers by way of advertisements placed in Marlboro cigarette packaging.

Standout e-cig Juul has been encroaching on Big Tobacco terrain since last Spring

Since it was first introduced by then-parent company Pax in 2015, the Juul has rocketed into first place as the most popular e-cigarette in the US, having swallowed up roughly 80% of the total e-cig market share, according to Nielsen data. Juul has even been credited with singlehandedly reviving the e-cigarette market, whose sales had been stagnating for years. 

Left in the dust as part of Juul's stellar success were other e-cigarette brands, including Altria's. The company discontinued sales of its e-cigs — once sold under brand names MarkTen and Green Smoke — shortly before the deal with Juul was announced.

With the Juul partnership, Altria sees some protective value. First, the deal ensures that Altria is invested in the standout e-cigarette on the market. Also, Altria has potentially steeled itself against another threat: plummeting US smoking rates, which fell from 21% in 2005 to 15.5% in 2016.

Analysts have suggested that Juul's runaway success could be partially responsible for these declines. They believe that adult smokers are increasingly turning away from burned cigarettes and reaching instead for devices like the Juul.

Read more: There's a new vape pen taking over America — and it has Wall Street worried about tobacco stocks

"The US tobacco market is beginning to be disrupted by Juul," Citigroup analysts wrote in a note circulated last April, adding, "We don't expect underlying cigarette trends to improve much in the rest of 2018."

Balancing Juul's protective potential with a 'cannibalization risk'

While the Juul deal has protective potential for Altria, it poses risks for the company too, according to the analysts' latest note.

As part of the partnership, Altria will take on a stronger role in shaping Juul's future. While Altria currently holds non-voting shares and an observer seat on Juul's board, its shares will transition to voting shares and it will gain two more seats on Juul's board once the deal with Juul is finalized, the analysts write.

But one issue the analysts see is that as Altria works to bolster advertising and sales of Juul, it risks threatening the future of its own tobacco brands, such as Marlboro.

"We see cannibalization risk from Altria's marketing support to Juul as Altria will be facilitating greater Juul adoption among smokers," the analysts write.

Read more: Morgan Stanley analysts say Juul is singlehandedly reviving the e-cig market, and Big Tobacco should be worried

As part of that marketing support, Juul will gain access to Altria's database of Marlboro and competitor brand smokers, something the company first disclosed in a newsroom post announcing the deal with Altria last December. Juul plans to target those customers with direct mailings and emails.

In addition, Juul plans to place coupons for its products into the packaging of an undisclosed percentage of Marlboro cigarettes.

"Our success ultimately depends on our ability to get our product in the hands of adult smokers," Juul CEO Kevin Burns wrote in a statement included in the newsroom post.

Overall as a result of the Altria deal, Juul's retail shelf space will triple.

"A key reason Juul partnered with [Altria] is to better target existing smokers," the analysts write.

SEE ALSO: Vaping might be better for you than smoking, but e-cigarettes like Juul come with risks of their own

DON'T MISS: MORGAN STANLEY: A startup valued at $15 billion is singlehandedly reviving the e-cig market, and Big Tobacco should be worried

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