Altria Group Inc (MO)

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San Francisco Unicorn Juul to Lay Off Over Half its Remaining Staff: Altria’s $12.8 Billion Go to Heck, But Not in a Straight Line
By: Wolf Richter | September 3, 2020

From 3,200 employees down to 1,000 employees in half a year.

San Francisco-based e-cigarette maker Juul – into which Marlboro-owner Altria plowed $12.8 billion in 2018 at the peak of the startup unicorn bubble – is planning to cut over half of its remaining 2,200 employees, after having already cut 1,000 employees in April. This will shave them down from 3,200 folks earlier this year to about 1,000 folks when everything is said and done.

It is also considering ending sales in Europe and Asia, and focusing instead on the US, Canada, and the UK, where 90% of its sales are concentrated, sources told the Wall Street Journal.

K.C. Crosthwaite, Juul’s new CEO as of a year ago, said in an email to employees on Wednesday that the business units under review don’t generate enough revenue to justify further investment, and that the cuts would allow Juul to invest in developing new products, in technology to curb youth use, and in research to demonstrate to regulators that vaping is less harmful than smoking cigarettes, according to the Wall Street Journal.

“While those investments will not provide short-term revenue, they will help us earn trust and build a company for the long term,” he said in the email.

For Altria, this is a gigantic mess. In 2018, Juul had revenues of $1.3 billion. In late 2018, Altria acquired a 35% stake for $12.8 billion at a “valuation” of $38 billion, during a funding round that raised $13.6 billion.

In February 2019, revenue for the year 2019 were expected to soar to $3.4 billion. Juul had made smoking cool again, and the sky was the limit, though regulatory problems had already cropped up in 2018.

But 2019 was the year when the big S hit the fan, and revenues came in at just $2 billion, generating a loss of $1 billion. Altria in turn, booked a $4.1-billion loss on its $12.8 billion stake, writing it down by one third in Q3 2019.

And according to Juul’s disclosure to employees, reported by the Wall Street Journal today, in Q1 2020, its revenues were $394 million, generating a loss of $46 million.

In 2019, a raft of deaths and hundreds of hospitalizations due to severe respiratory illness associated with vaping woke up researchers and regulators. In May 2019, North Carolina became the first state to file a lawsuit against Juul, accusing it, among other things, of targeting teens. Other states followed with legal action, and this has continued through this day. The latest was Washington state, which today filed a consumer protection suit against Juul, alleging that it targets underage consumers.

In September 2019, the CDC recommended that people “consider refraining from using e-cigarette or vaping products.” The FDA began investigating Juul’s political ads and other activities with which Juul was fighting legislative moves to ban or limit the sale of its products at the local and state levels, and in September 2019 ordered Juul to immediately cease making the claim that vaping is safer than smoking. By that time, Juul was smarting from having gotten slapped in the face when its hometown, San Francisco, banned the sale and distribution of e-cigarettes.

So Juul did a 180. It stopped these campaigns, and it stopped most advertising in the US.

But the problems went on. In April 2020, The Federal Trade Commission filed an antitrust suit against Altria, alleging that Altria made secret deals with Juul in 2018 under which Altria exited the vaping market and acquired what had been its competitor.

Juul tried to expand overseas, as so many startups with tons of money like to do, without getting the necessary approvals. This led to confrontations that Juul lost, including in China. And now Juul is throwing in the towel. It has already pulled out of South Korea, Austria, Belgium, Portugal and Spain and is considering pulling out of Germany, Italy, Russia, Indonesia, the Philippines, and other countries.

When the WSJ reached out to Juul concerning the new round of layoffs and the pull-back, a spokesman said, “No final decisions have been made and we will continue to go through our evaluation process.”

Juul also is losing ground to competition – which comes in two forms, from regular cigarettes to which some vapers are returning after all the turmoil in 2019, and from makers of other e-cigarettes, such as Vuse, which Reynolds American had launched in 2013.

Juul sales at retailers in the US has plunged 33% in the four weeks ended August 8, according to Goldman Sachs analyst Bonnie Herzog, and it market share has dropped to 58%, down from 75% in November 2018, the period when, facing a regulatory crackdown, it stopped selling through retail channels flavored nicotine products that were favored by teens – though it kept selling them on its website where it could try to block underage purchasers.

Altria now has this gigantic mess on its hands, in the form of its $12.8-billion crown jewel that continues to lose money, that it has already written down by one-third, that is shrinking and is steeped in regulatory problems and is getting hammered by competition.

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