Reynolds Values Vuse

Continues to pin hopes on digital vapor cigarette, despite "drag"

Greg Lindenberg, Editor, CSP

Reynolds American Vuse digital electronic cigarette (CSP Daily News / Convenience Stores / Tobacco)

WINSTON-SALEM, N.C. --Reynolds American Inc. has announced second-quarter 2014 of $492 million, 6.7% higher than the $461 million for the same period last year, and $855 million for the six months ended June 30, 2014, an 11.9% decrease from the $969 million from the same period for 2013. The results reflect higher cigarette and moist-snuff pricing, more than offsetting lower cigarette volume and increased investment on the Vuse Digital Vapor Cigarette expansion, the company said.

R.J. Reynolds Vapor Co.'s Vuse continued to perform well in its initial markets in the emerging smoke-free category, said the company. It began the first phase of its national expansion in June, and the next wave of distribution is scheduled for early September.

Vuse incorporates automated manufacturing to ensure a consistently reliable cartridge; it is sold in a rechargeable format. The Vuse system includes flavor cartridges, a rechargeable VUSE PowerUnit, a USB charger and an AC wall adapter and a carrying case. Depending on use, a cartridge lasts about as long as one pack of traditional cigarettes.

"The Vuse rollout is progressing smoothly, and the brand is now in about 21,000 selected retail outlets," said Susan M. Cameron, president and CEO of Reynolds American, noting that investment in Vuse will continue to impact the company's earnings in the second half of this year as the brand increases production capacity in line with its growing national presence.

"I'm thrilled by Vuse'ss strong performance into its first major market in Colorado, which was followed by Utah, Wisconsin and Indiana. This is a game-changing vapor product that we believe will carve out a leading position in the vapor category. We continue to believe that vapor will be a key dynamic in the transformation of the tobacco industry," Cameron said during the company's earnings call.

She said that it "truly does satisfy the consumer in a way that almost all other, I suspect e-'cig-alikes' do not. … If we look at the tanks, and if we look when Vuse went into Colorado … before that tank sort of alternative had become the wave, and we've seen very low development in the tank space. So I feel very confident that as Vuse rolls out nationally and people can be satisfied with Vuse, which doesn't have the refilling issue, it's very convenient, it's very sanitary … I believe we'll see Vuse make a real impact on that market. But consumers are experimental, and we'll have to see where we land. But I believe that our objective is to become a leader in this vapor category and that Vuse has the capacity to deliver that."

Bonnie Herzog. managing director of beverage, tobacco and convenience store research at Wells Fargo Securities LLC, New York, said in a research note that "bottom line, we remain very bullish on vapor and expect re-acceleration of category growth once Vuse and [Altria's] MarkTen have a greater national presence."

She said, "While Vuse currently is a drag on earnings, the brand is expected to be profitable by mid-2015. Management reiterated it is still very early days for vapor and consumers remain experimental and thus declined to quantify the current vapor impact on combustible cigs (we believe it's in the low single digits). While management believes Vuse is a 'game-changing' product, it is already 'contemplating' next-gen manufacturing, which we think is positive given the rapid pace of innovation and change in the vapor category."

Reynolds American also reported gains on all operating companies' key brands:

  • Camel cigarette share up 0.4 points at 10.2%.
  • Pall Mall cigarette share up 0.1 points at 9.3%.
  • Grizzly moist snuff share up 0.7 points at 31.4%.
  • Natural American Spirit cigarette share up 0.2 points at 1.6%.

Cigarette volumes continued to be negatively impacted by the economic pressures on consumers' disposable income, as well as the growing demand for smoke-free alternatives.

As a result, RJR Tobacco's second-quarter cigarette shipments declined 8.3% from the prior-year quarter, while industry volume declined 5.5%. Taking into account adjustments for wholesale inventory changes, RJR Tobacco estimates its volume was down about 6.8%, while industry volumes were down approximately 4.4%.

RJR Tobacco's total cigarette market share was down 0.1 percentage points from the prior-year quarter, at 26.5%, but Camel and Pall Mall, the company's growth brands, delivered additional market share gains.

The strong performance by Camel and Pall Mall resulted in an increase of 0.5 percentage points in their combined share, to 19.5%. These brands now make up over 70% of the company's total cigarette portfolio.

Camel increased second-quarter market share by 0.4 percentage points from the prior-year quarter, to 10.2%, benefiting from growth in the brand's premium menthol styles.

Camel Snus maintained steady performance in the growing snus category, with market share remaining at about 80% in the quarter.

Pall Mall, a leading value brand, increased second-quarter market share by 0.1 percentage points from the prior-year quarter, at 9.3%.

Winston-Salem, N.C.-based Reynolds American is the parent company of R.J. Reynolds Tobacco; American Snuff Co. LLC; Santa Fe Natural Tobacco Co. Inc.; Niconovum USA Inc.; Niconovum AB; and R.J. Reynolds Vapor Co.