Newport''s ‘Pleasure Lounge’ Aims to Ignite Cigarettes Sales

Source from:  The Wall Street Journal 09/14/2016

Workers for Newport, the nation's No. 2 cigarette brand, spent the summer handing out coupons for cigarettes at a price of $1-a-pack. That is five cents a smoke.

Usually they cost about seven times that much.

The vouchers—distributed at concerts, bars and convenience stores—have been part of an aggressive push by Newport-owner Reynolds American Inc., to target young adult smokers and boost Newport sales.

The cigarette brand was the primary reason Reynolds bought rival Lorillard Inc. for $25 billion last year. Newport, which accounted for almost all of Lorillard's $7 billion in sales in 2014, has been the only major brand consistently gaining share of the shrinking cigarette market over the past decade. Its minty, menthol style has gained in popularity among millennials, who have shown a preference for more flavorful options.

The coupon giveaways have been a boon to smokers like Jackie Hauri. The 23-year old expected to spend $14 on two packs of cigarettes during the three-day Rock USA festival in Oshkosh, Wis. Instead, she went to the Newport Pleasure Lounge, a mobile, air-conditioned trailer in the festival’s sponsor village, and bought 40 cigarettes for $2. She also got to play virtual darts and other games.

"If you're a smoker, it's a smart way to turn you onto the brand because it's fun and entertaining and you get cheap cigarettes," said Ms. Hauri, a regular Newport smoker.

The Newport Pleasure Lounge has helped turbocharge the brand. Newport's rate of market share growth has nearly doubled over the past year to approximately one half of a share point, and its U.S. market share has increased to 13.9% from 13.4% last June, according to Reynolds.

The gains added about $200 million in incremental revenue and $150 million in operating profit in Reynolds' most recent quarter, according to Wells Fargo tobacco analyst Bonnie Herzog.

Reynolds earmarked about $50 million this year to promote the brand at events and bars, according to a former executive who worked on Newport. It also is peddling the brand through a 2,300-person sales force—nearly double the size of Lorillard's.

Shay Mustafa, Newport's vice president of brand marketing, declined to comment on marketing expenses but said this is the first time in at least 15 years Newport representatives are directly engaging consumers.

Two 18-wheelers have taken Newport lounges to events popular with 21- to 30-year olds such as Las Vegas' Electric Daisy Carnival, an electronic music festival for 400,000 people, and Rock on the Range, a Columbus, Ohio, music festival featuring Megadeth and Rob Zombie.

The lounges are open only to smokers over 21 years old. A brand representative, typically in a Newport-green shirt, checks IDs and turns away nonsmokers, said Ms. Hauri.

A Reynolds spokesman said the company exclusively targets smokers because it believes no one should start smoking. Instead, it aims to increase its 35% share of 40 million American smokers with its brands like Camel and Pall Mall.

Most people inside the lounge at Wisconsin events were in their 20s or 30s, said Ms. Hauri.

Newport's appeal to that age group was one of the reasons Reynolds bought Lorillard, according to Debra Crew, president of the company's R.J. Reynolds unit. Nearly 50% of smokers under 30 years old prefer menthol cigarettes, up from 39% in 2007, according to market-research data from Burke Inc. cited by Reynolds.

About 20% of 18- to 25-year-old smokers call Newport their preferred brand, up from 17% in 2005, according to analysis of the government-funded 2014 National Survey of Drug Use and Health.

The appeal of mentholated cigarettes mirrors a broader preference among millennials for more flavorful foods and beverages such as Bud Light Lime-A-Rita, consumer-products experts have said.

Eric Penicka, Euromonitor International's tobacco analyst, said menthol brands benefited from a 2009 ban of other flavors like clove cigarettes. Menthol became the style "that could jazz up the smoking experience,” he said. He also said the rise of flavored e-cigarettes also may be a contributing factor to menthol's popularity.

The Food and Drug Administration raised the possibility of a future menthol ban in 2013, saying menthol smokers are less likely to kick the habit. Reynolds and Lorillard sued over an FDA-commissioned report on menthol, and the FDA hasn't pushed forward on a ban.

Anti-tobacco groups led by the African American Tobacco Leadership Council held a news conference Tuesday calling on the FDA to take action on a menthol ban. They also sent a letter to President Barack Obama urging him to press the FDA to remove menthol cigarettes from the market.

Reynolds Executive Vice President Cressida Lozano said Newport "primarily" takes share from top-selling Marlboro, owned by Altria Group Inc. That brand's share slipped to 44.1% in June from 44.2% a year ago, according to Altria. Newport also takes share from Reynolds-owned Camel and Imperial Brands PLC cigarettes, Salem and Kool.

Newport's share growth isn't exclusively because of young adults. Reynolds also marketed Newport to older smokers and lesbian, gay, bisexual and transgender smokers, taking the Pleasure Lounge to Nascar races like the Pure Michigan 400 and PrideFest Milwaukee.

Newport remains the favorite among black smokers, with nearly 60% of African-American smokers calling it their preferred brand, according to the 2014 National Survey of Drug Use and Health.

Launched in 1957, the brand's rise began in the 1980s when it started giving away cigarettes to minority smokers and "potential new triers" in New York, Los Angeles and elsewhere, according to tobacco-litigation archives. Similar sampling practices came under fire in the 1990s when a television broadcast on Fox's "A Current Affair" showed two teens getting free packs of Reynolds cigarettes without identification. Enditem