OAK BROOK, Ill. -- Reynolds American Inc. (RAI) knows how to make headlines, too. A day after Philip Morris USA parent Altria Inc. dropped the bomb that it would acquire moist-smokeless tobacco leader UST Inc., RAI said it would restructure its brand portfolio and overhaul its organizational structure, along with that of its largest subsidiary, R.J. Reynolds Tobacco Co.
As reported in a CSP Daily News Flash yesterday, among the changes to its brand portfolio, RAI plans to scale back marketing and promotional support for the menthol brand Kool, shifting its status from "growth brand" to "support [image-nocss] brand" while increasing its investment in the Camel and Pall Mall brands. Future marketing and promotional support for Kool will be targeted toward geographic areas where the brand demonstrates strong consumer appeal, the company said."It's a smart move," Nik Modi, senior tobacco analyst for UBS Securities LLC, New York, told CSP Daily News. "They were inefficiently spending money on Kool as a growth brand, so it makes sense to de-emphasize it in certain areas and focus more on the pockets of the country where it's strong."The move could also help RAI develop "a flagship brand, such as Philip Morris has done with Marlboro," and not just "a portfolio of products," Lou Maiellano, principal with tobacco consultancy TAZ Marketing & Consulting Group, Levittown, Pa., told CSP Daily News.
Of all the brands in RAI's stable, he believes Camel would best fit that bill. "Camel has a fantastic following in the 21-to-35 age segment," he said. "In the past, a brand like Camel had to have the marketing support to grow, and now I think you will see an emphasis on this support, all within the spirit of turning it into a flagship brand."
Maiellano said the restructuring could be "a precursor of the new RAI of the future," but other than the realignment of brands, he does not envision the move affecting retailers to a great degree. "This is an internal move," he said. "I see this as a non-event at retail."
He added, "I see them as reformatting the company they hope it to be in 2009. They are reallocating funds to pave the way for new entries and new products. A huge part is that Reynolds is looking to put down a foundation of who they will be in the future.… It's an evolving industry; it's not like any of these moves had not been forewarned."
Camel had been RAI's "highest-priority growth brand" prior to the change, according to Maura Payne, RAI's vice president of corporate communications. She said the restructuring would simply help "free up the resources to put behind the areas of opportunity we see coming."
She told CSP Daily News, "I should think that would be heartening to the retail community," she told CSP Daily News. "We believe there is innovation across the entire spectrum of tobacco products…. and we'll continue on that path by putting more resources and energy behind the places we see as growth categories. This is a profitable category for retailers, and it will remain as such."
In the wake of Monday's Altria-UST deal, speculation loomed over the possibility of more consolidation in the months ahead. One analyst, who asked to remain anonymous, believed RAI's move to de-emphasize Kool could be a precursor to purchasing Lorillard Tobacco Co., Greensboro, N.C., which owns the menthol segment's leading brand, Newport. The analyst suggested there was "some degree of overlap" in terms of customer demographics between the two brands, with Newport having much stronger share.
"I think going back to what happened [Monday] with Altria and what we're seeing elsewhere, it's going to create more consolidation," said Modi. "Reynolds has to do something. Swedish Match has to do something. Lorillard has to do something. It's going to be an interesting next couple of months."
As for RAI's planned organizational restructuring, the company plans to lay off 570 workers, or about 16% of its work force, at company headquarters in Winston-Salem, N.C. The cuts are expected to begin in the third quarter and last through the end of 2009. Neither Conwood Co. LLC nor Santa Fe Natural Tobacco, both of which are RAI divisions, were affected by the restructuring, according to Payne.
"Our field trade-marketing folks that are calling on customers were not part of this analysis," she said. "The job losses were primarily in the Winston-Salem area.… It's probably too early to signal too much about the retail changes behind the decisions."
RAI will record a pretax third-quarter restructuring charge of approximately $90 million, or about $55 million after tax. The $90-million charge represents severance, benefits and related
costs. Reductions in the RAI and R.J. Reynolds Tobacco work forces will generate savings of about $100 million by year-end 2010, with annualized savings of about $55 million thereafter.
Modi of UBS Securities believes RAI's restructuring could lead to more store-level support for tobacco retailers. "Over the last few years [RAI] has made its IT infrastructure more efficient, so while we're seeing a reduced headcount, they're going to use technology instead of people," he said. "And I think it's likely that a lot of the savings will get reinvested back into the trade."
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