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Alliance One International (AOI) |
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WIKI ANALYSIS
Alliance One International (NYSE: AOI) purchases, processes, stores and sells leaf tobacco. By purchasing tobacco from the US, Africa, Europe, South America and Asia, the company makes a profit by turning it around and selling it to customers primarily in US, Europe and Asia.[1] While the company does not manufacture cigarettes or other consumer tobacco products, increasing awareness and public campaign against anti-smoking has led to a shift of markets from developed to developing countries, where less stringent regulation and less health education allows tobacco companies to proliferate. Even then, the increase of ethically and sustainable investors stunt the growth in stock price for tobacco companies such as AOI.
Business Growth
As the selling of tobacco products in developed countries begin to become more and more regulated, AOI has shifted their business line by providing agronomy expertise for growing leaf tobacco as a source of business growth. The majority of revenues still come from the sales of processed tobacco and fees charged for processing and related services to these manufacturers of tobacco products though.[2] As international large cigarette manufactures begin to expand operations throughout the world, especially into Asia, Eastern Europe and Russia, AOI has followed suit by providing services to local agronomic practices, as local sources of leaf tobacco help save these companies from otherwise high tariff rates and freight costs.[3]
In FY2010, AOI took in $2.1 billion in revenue, of which AOI delivered approximately 54% of its tobacco sales to Europe and 14% in US.[4] Over 10% of revenues each come from Altria Group (MO), Japan Tobacco International (JAPAF), or British American Tobacco (LON:BATS).
Trends and Forces
Industry Consolidation within Tobacco is Inevitable
As the industry is maturing or even declining in certain markets, consolidation is inevitable for large multiple multinational cigarette manufacturers. This translates to a greater amount of acquisitions or joint-ventures with companies like AOI. For example, Japan Tobacco International (JAPAF) enhanced leaf procurement capabilities by acquiring small leaf processors in Malawi and Brazil and forming a joint venture for tobacco leaf in the United States.[5]
There has also been an increase in supplier contracts between Altria Group (MO) in Brazil with AOI as the company continues to strengthen its direct leaf procurement capabilities. AOI is only one of two global publicly traded leaf tobacco merchants. As a result, AOI continues to be a major player in most tobacco growing regions of the world, but recent vertical integration initiatives have given local independent leaf merchants with low fixed costs and overhead a chance to compete with changes in buying patterns.
Decrease in Consumer Demand in Developed Markets means a Shift to Emerging Countries
The demand for tobacco products is subject to many health and wellness factors. Increased public awareness of health risks about the dangers of cigarette smoking has led to a decrease in the number of smokers. This figure ranges from roughly 40% of the population in in the 1950s to around 20% in the early 2000s.[6] Furthermore, though the health risks of cigarette smoking was known for some time, the change in social acceptability of smoking has fueled a new round of quitters. In particular, the decrease in glamorization of smoking in developed markets with increase in government regulation in areas that are permitted to smoke has made it more and more inconvenient to smoke, thus affecting AOI's profitability. Therefore, in a business sense, the profitable way to go for these companies is toward emerging markets, where the social infrastructure has not been built yet for smoking awareness.[7]
Competition
AOI competes with the big cigarette manufacturing firms for contracts as well as a surplus of small local privately held leaf procurement facilities. Large cigarette manufacturing firms include:
- Altria Group (MO), formerly Phillip Morris, manufactures and sells cigarettes and smokeless products, as well as wine. It's wholly owned subsidiary, John Middleton Co., manufactures and sells machine-made large cigars and pipe tobacco.
- Universal (UVV) ) is a leaf tobacco merchant and processor with the largest portion of the company’s business in the procurement, processing, packing, and supply of flue-cured and burley leaf tobacco to manufacturers of consumer tobacco products.
- Reynolds American (RAI) is a holding company with operating subsidiaries that include a cigarette manufacturer named R. J. Reynolds Tobacco Company, and the smokeless tobacco products manufacturer called American Snuff Company.
References
- ↑ AOI FY2010 Form 10-K, Pg 2
- ↑ Alliance One International, Inc. Announces Processing Agreement with JTI in Brazil
- ↑ AOI FY2010 Form 10-K, Pg 3
- ↑ AOI FY2010 Form 10-K, Pg 5
- ↑ Alliance One International, Inc. Announces Processing Agreement with JTI in Brazil
- ↑ "U.S" Smoking Rate Still Coming Down"
- ↑ Triangle tobacco firm hires turnaround pro as its CEO
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