Big Three Earnings and Brand Strategy

Altria, Reynolds American and Lorillard report fourth quarter earnings.

Linda Abu-Shalback Zid, Senior Editor

Within the last couple of weeks, the "big three" of tobacco reported their fourth-quarter earnings and talked about the brand strategies driving the results.

Reynolds American Inc.
The company's $309 million in profits is an increase of 43.7 percent vs. last year's fourth quarter, driven by gains in volume and share on key brands, and improved pricing and efficiencies, according to Daniel M. Delen, president and CEO elect. (Delen will assume his new role March 1, following the retirement of current CEO Susan Ivey.) Earnings per share were $0.53, compared to $0.37 [image-nocss] in the year ago quarter.

The company is striving to reduce complexities, and ended the year with less than 150 SKUs--a reduction that represents four out of every five of the SKUs that it had back in 2004. Further reductions are planned for 2011. Both R. J. Reynolds' growth brands, Camel and Pall Mall, played major roles in the company's strong performance.

Camel's Q4 cigarette market share increased by sixth-tenths of a percentage point from the prior year quarter to 8 percent--the brand's highest market share in more than 40 years. Camel's menthol capsule technology offers a "unique product point of difference over competitive menthol brands," according to Delen. Including Camel Crush, Camel's menthol market share jumped seven-tenths of a percentage point from the prior year quarter, to 2.1 percent.

Camel's new line of dissolvable tobacco products--Camel Orbs, Sticks, and Strips--have received product and packaging upgrades and will be introduced in two new lead markets in March.

Pall Mall increased its Q4 market share by 2.3 percentage points, to 8.3 percent. For the full year, Pall Mall gained 2.7 percentage points to 7.4 percent. Driven by the brand's value proposition, that's the brand's highest market share since 1975.

Altria Group Inc.
Altria reported a profit of $919 million, or 44 cents a share, up nearly 27 percent from $725 million, or 35 cents, a year earlier. The results were driven by increased Marlboro share and snuff sales, according to Michael Szymanczyk, chairman and CEO.

Marlboro's retail share for the three- and twelve-month periods increased 0.6 and 0.8 share points, respectively, as the brand benefited from the introductions of Marlboro Special Blend in the first quarter of 2010 and Marlboro Skyline Menthol in the fourth quarter of 2010. Philip Morris USA's retail share for the three- and twelve-month periods decreased 0.2 and 0.1 share points, respectively.

In the smokeless products segment, new product launches of Copenhagen Long Cut Wintergreen, Long Cut Straight and Extra Long Cut Natural helped drive Copenhagen's retail share gains and volume growth. Efforts are also being made to increase Skoal's performance, with the national launch of 10 new Skoal products in the first quarter of 2011. Snus also seems to be an increased focus, with two new Marlboro Snus varieties and Skoal also shipping two new snus varieties.

Lorillard Inc.
Lorillard's net income in the fourth quarter of 2010 was $259 million, or $1.74 (basic and diluted), compared to $242 million, or $1.52 per share (basic and diluted), in the fourth quarter of 2009.

The company's flagship Newport brand grew 2.2 percent, benefiting from the launch of Newport Non-Menthol, which continues to grow, according to Murray S. Kessler, CEO. "Newport Non-Menthol is gaining trial in the marketplace, and volume continues to grow week to week. It's too early to assess its long-term potential but we are encouraged with what we see so far."

Based on Lorillard's proprietary retail shipment data, Newport continued to increase its domestic retail market share during the fourth quarter of 2010 by .8 share points to 11.2 percent, an all-time high. Newport non-menthol accounted for .5 share points of the increase.

Annual domestic wholesale shipments increased 5.3 percent in 2010, compared to a 3.8 percent decline in industry domestic wholesale shipments. "Lorillard is not in need of course correction," Kessler said. "We do see, and the analysis supports that there is an opportunity for organic portfolio expansion and geographic expansion beyond our core markets for further upside, albeit these must be pursued carefully and disciplined."

The company's lower-priced Maverick brand's volumes were up 25.2 percentlikely benefiting from the struggling economy.

When asked if the company would expand into the smokeless category, Kessler said the company will report on that in the next few months, adding that "Lorillard's a different animal in the tobacco industry." He said, "We have to look at what makes sense for us."