GREENSBORO, N.C. -- Who says powerful CEO’s don’t pay attention to public opinion? Back in July, Lorillard Tobacco Co.’s CEO Murray Kessler found himself not just reading about CSP’s survey of what tobacco retailers thought of the then-recently announced merger between Lorillard and Reynolds American Inc. (full story here), but actually reaching out to retailers himself to get a read on the situation.
According to Kessler, he was concerned that 32% of surveyed retailers thought the deal would negatively impact their business and some 41% were mixed. (Only 27% of surveyed retailers were positive.)
“I thought to myself ‘that’s concerning because this is a competitive deal that’s good not just for shareholders and employees, but retailers too,’” Kessler told Tobacco E-News.
"When I talked with retailers, the thing that surprised me was, despite the information that's out there, there was still a good degree of confusion about the details of the transaction," he said, adding that many people he spoke with thought it was a flat-out "Reynolds buys Lorillard" transaction, with limited awareness of Imperial's role, especially related to their acquisition of Lorillard's organization and facilities.
“This is the part that most people did not really understand or appreciate,” said Kessler of Imperial’s purchase of Lorillard’s manufacturing facility, headquarters, research and development facility and the majority of the company’s 2900 employees. Thus making Imperial a solid No. 3 player, both in terms of its brand portfolio (which will now include cigarette brands like Winston KOOL, Salem and Maverick, as well as the top-selling electronic cigarette, blu), and, perhaps more importantly, infrastructure.
“If you asked Imperial what their weakness is, in the past not only did they not have the brands, they did not have the infrastructure,” Kessler said. “It’s a big component of how Imperial views this investment: it’s not just in the brands, but the people. They’ve tripled their selling organization in size, sales and capacity.”
The transfer of the Lorillard sales force and infrastructure means Reynolds gets the cost-savings without actually eliminating positions. In Kessler’s view, it’s a big win across the board.
“After this deal is completed, Reynolds becomes a stronger No. 2 U.S. competitor who goes to a 32% market share with flagship brands Newport, Camel, Pall Mall, Santa Fe, Grizzly and Vuse,” he said. “They believe, and I believe (otherwise I wouldn’t have accepted stock as part of the transaction for Lorillard shareholders) that is a much stronger company; a much larger percentage of their portfolio becomes strategic and focused.”
Making it better positioned to go up against Altria’s 50% share and Imperial's 10% share.Kessler noted that, after such a big investment, Reynolds will certainly want to continue Newport's winning ways.
"They've spent $27 billion and will want to do everything to grow those brands, making this a success," said Kessler. "There's no doubt in my mind that this means more competition for Altria.”
Still, many retailers are concerned that Reynolds’ increased heft might prompt the No. 2 player to act like Altria in addition to competing with them.
"That's a hard one to react to, a fear of the unknown," Kessler acknowledged, though he does not believe this will be the case. "The fact of the matter is, whether Reynolds is a 25% share today or a 32% afterwards, Altria's still a 50% share. It's pure speculation and inconsistent with what I have observed in our merger discussions that Reynolds is going to have more leverage and, therefore, more restrictive programs. I believe their focus will remain on brand-building and innovation.”
“It’s hard for me to imagine a more competitive marketplace, with everyone investing, where retailers don’t benefit,” Kessler surmised.
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