Pitching the Pall Mall cigarette brand as a "premium product at a sub-premium price" has been a key factor in Reynolds American Inc.'s ability to boost profits during the recession.
Reynolds, however, may have marketed Pall Mall too well for its overall image.
Considering that Pall Mall's sales and market share pulled almost even with Camel in the third quarter, Reynolds' top brand may soon not be its top seller.
![]()
Pall Mall's market share was 7.8 percent in the third quarter, and its cigarette volume was at 5.5 billion. That's up from a 1.95 percent market share and a quarterly cigarette volume of 1.6 billion when Reynolds elevated it to a growth brand in 2006.
By comparison, Camel essentially has treaded water the past four years. It was at 8 percent market share and 5.6 billion in cigarette volume in the third quarter.
"It is a curious scenario to have to ask whether or not a company can be too successful in pressing the case of one product so it becomes a negative driver for the fortunes of another product within the merchandise offering," said Stephen Pope, an industry analyst and the managing partner of Spotlight Ideas in England.
"To use a Boston Consulting Group term - Camel is the cash cow, whereas Pall Mall is the star."
The dilemma is not troublesome to Reynolds, according to Daniel Delen, the chairman, chief executive and president of R.J. Reynolds Tobacco Co.
Delen is scheduled to become chief executive-elect and president-elect of Reynolds American on Jan. 1 as part of the preparation of Susan Ivey's retirement from those posts on Feb. 28.
"Pall Mall is the right product at the right time," Delen said. "The weak economy continues to affect consumer spending. We keep seeing increasing rates of trial and increasing rates of conversion and sticking with the brand."
Delen said that Reynolds "remains very much focused on Camel above all else, but we're very happy and confident that we can continue the growth on Pall Mall as well."
"As we go through different economic cycles, they both play an extremely important role within the portfolio," he said.
Reynolds acquired Pall Mall, a 111-year-old brand, in the 2004 purchase of Brown & Williamson Tobacco Corp.
Pall Mall's gains are simple to explain even as they defy shrinking overall U.S. cigarette sales, analysts said. Give consumers a less-expensive product and hope they like it enough to stick around when prices go back up.
Camel and Pall Mall represent 55 percent of Reynolds' 20.1 billion in cigarette volume during the third quarter. That overall volume, however, was down 2.5 percent from a year ago.
That Reynolds had a modest volume decline "reflected the continued strength of Pall Mall, as well as resilience of the Camel brand," said Christopher Growe, an analyst with Stifel Nicolaus.
A good amount of Pall Mall's surge in popularity comes from Reynolds' aggressive marketing and price discounts. Reynolds made the most traction with Pall Mall by offering discounts as the federal excise-tax increase was implemented.
Reynolds is not running any current price discounts with Pall Mall, spokesman David Howard said.
"What we are experiencing is strong consumer loyalty as a result of what Pall Mall offers adult smokers - a high quality, longer-lasting product at a reasonable price," Howard said.
"As the reasonable price might get their attention, the product's attributes strengthen their loyalty to the brand."
It's not unusual for manufacturers to market a value and a luxury brand to appeal to different customer demographics.
Think of Toyota and Lexus, McDonald's with the Big Mac and its dollar menu.
Typically, though, the choices are different enough that they don't compete directly for consumers. Not so with Pall Mall and Camel.
"The demand for cigarettes is a curious metric," Pope said.
"Higher prices on cigarettes will force some users out of the market, but only after they have shifted through the spectrum of cheaper offerings. Still, demand is price inelastic and that has allowed Reynolds to make gains despite selling a smaller total number of cigarettes."
Analysts said that Reynolds likely will be able to slowly raise the price of Pall Mall because of the market share gains, bolstering profits as it attempts to grow the smokeless side of the business.
That prospect, along with Reynolds' recent higher earnings forecasts, has attracted investor confidence in its stock as well.
A potential downside to Pall Mall's market-share gains is the possibility, perhaps probability, that Philip Morris USA will temporarily drop its prices on Marlboro to limited further erosion.
"When times are tough, those that choose to continue to smoke will seek value for money, but better they stay with a Reynolds product as against decamping to another provider," Pope said.
"Clearly the hope is that those ex-Camel smokers will know that Pall Mall was a 'friend' in the tough times. When conditions are better, they are more likely to upgrade to Camel again than shift to an external product. It is about family inclusiveness."
The signature image of a company "is a matter of choice and commitment, not current sales," said John Sweeney, the director of the sports-communication program at UNC Chapel Hill.
"Apple didn't change its identity when the iPod proved successful. Coca-Cola will continue to be the flagship identity of the company even if Coke Zero and Diet Coke eventually exceed the classic brand.
"That means the Camel doesn't need to get a layoff notice," Sweeney said. Enditem
