The Smoke Clears

Investment, innovation to put UST back on the growth track in 2006

NEW YORK -- Asignificant investment in new product innovation and a commitment to courting adult smokers are part of U.S. Smokeless Tobacco Co.'s plan to get back on the growth track by stabilizing sales of premium moist smokeless tobacco in 2006.

During yesterday's analyst and investor conference in New York City, the subsidiary of Greenwich, Conn.-based UST Inc. outlined a multi-pronged corporate strategy to grow the category overall while shoring up sales in areas of the country hardest hit by the effects of value-priced brands.

U.S. Smokeless Tobacco's 2006 plans call for an $80 million investment in initiatives aimed at increasing brand loyalty for premium brands Skoal and Copenhagen. While acknowledging the price-value segment's increasing influence, company president Dan Butler illustrated that premium brands remain dominant, if not in growth mode, throughout much of the country and that price-value brands are thriving in areas characterized by lower household incomes where category growth remains below average.

He also said that as much as 19% of the category's total estimated volume in 2005 was purchased by switchers, or consumers who switch from premium to price-value brands depending on the amount of money they have in their pocket.

This creates a huge opportunity for premium brands, one that U.S. Smokeless Tobacco intends to seize through an integrated marketing and pricing support plan, accompanied by product and packaging innovations.

In first-quarter 2006, U.S. Smokeless will launch the first major innovation to brand leader Copenhagen since 2002. Butler described the new productCopenhagen Long Cut Straightas having a more approachable, smooth flavor profile that should help attract new adult consumers to a subsegment that already represents about 9% of category volume. Trial has exceeded expectations, with 66% of post-trial consumers saying they would probably or definitely buy it in the future.

The company will also place a more intense focus on building its nascent but growing Pouch business. Copenhagen and Skoal Pouch volume grew an estimated 29% in 2005, on top of a 27% gain from the prior year.

Starting Jan. 1, 2006, when the plan kicks in full bore, according to UST president and COO Murray Kessler, U.S. Smokeless Tobacco will ramp up efforts to convert adult smokers into moist smokeless users specifically by increasing its investment in direct marketing and one-to-one event marketing, where its investment will grow from an estimated $105 million in 2005 to an estimated $116 million in 2006. Through what has proven to be a phenomenally successful program, the company intends to double the size of its direct-marketing base to 2.4 million adult smokers, with the goal of creating 110,000 new adult moist smokeless consumers in 2006.

Through all its next-year initiatives, the company expects its 2006 plans to result in targeted consolidated net sales of $1.89 billion and net earnings of $494 million for its smokeless tobacco and wine businesses. In 2005, the company generated record net sales of $1.9 billion.