Reynolds, ITG Brands Heading in Opposite Directions Since Acquiring Cigarette Brands

Source from:  Winston-Salem (NC) Journal 01/28/2016

Reynolds American Inc. and ITG Brands LLC continue to go in opposite directions in the seven months since they acquired prominent traditional cigarette brands.

Reynolds gained top-selling menthol brand Newport on June 15 through a $29.25 billion megadeal to buy Lorillard Inc., a risky transaction given the potential for stricter federal regulations on menthol products.

Analysts said Lorillard was content with a status-quo marketing approach to Newport since it was not likely to catch top-selling traditional cigarette brand Marlboro (46.9 percent market share). Lorillard also lacked intense competition from rival menthol brands.

With Reynolds introducing Newport line extensions, stepped-up advertising and a strong promotional push, Wells Fargo Securities analyst Bonnie Herzog said Tuesday that Newport could increase its market share toward 15 percent in 2016, compared with 13.3 percent now.

Meanwhile, ITG Brands has slid backward with its overall market share since parent company Imperial Tobacco Group Plc spent $7.1 billion to buy Kool, Maverick, Salem and Winston and electronic cigarette blu eCigs from Reynolds. ITG Brands' main operations are in Greensboro.

ITG went from a 4 percent market share to 10 percent market share when it acquired the four traditional cigarette brands - a key factor in getting federal anti-trust approval of the deal.

However, ITG's market share was down to 7.4 percent by mid-December. Winston's market share is 2 percent.

Herzog said 60 percent of the retailers she surveys nationally said they believe ITG will continue to lose market share.　They also project ITG will lose shelf space to Reynolds this year as Reynolds rolls out its every-day-low-price program with Newport now attached.

The program is a voluntary retailer contract that provides pricing discounts to retailers of up to $4 a carton, or 40 cents a pack, off Reynolds' best-selling brands. In order to get the discount, retailers must agree that Reynolds' Pall Mall is the lowest-priced cigarette in their stores.

Reynolds agreed to a six-month delay on adding Newport as part of the deal with Imperial. The current retailer participation rate is 60 percent. Herzog projects Reynolds could reach 75 percent participation.

Before Reynolds acquired Newport, the main leverage it had for getting participation was Camel, the No. 3 brand with an 8.3 percent market share as of Sept. 30. Pall Mall is at 7.8 percent.

"We believe ITG's woes largely stem from a lack of focus given brand breadth and loss of leverage to powerhouses Reynolds and Altria," Herzog said.

"To counteract, ITG has increased promo support behind Winston, but retailers have yet to see the investment pay off.

"We believe a major strategic pivot is in order," she said.

Herzog said Reynolds is not only likely to gain Newport market share from ITG and Marlboro's menthol styles, but it is also making headway with non-menthol Newport Smooth Select Gold style.

"We believe Reynolds is now very well positioned to drive share gains and margin expansion, while managing its growth brand pricing structure and accelerating growth for Newport and its entire portfolio," Herzog said.

"The overall combustible cigarette environment remains healthy given strong industry pricing power driven by a stronger tobacco consumer, continued up-trading to premium brands, and lower retail gas prices." Enditem