NEW YORK -- Smokeless-tobacco sales were up 6.1% in the first quarter of 2005, according to ACNielsen data, but the news is not all good on this front as consumers make the move from premium to value-priced brands, according to a recent tobacco note from analyst Bonnie Herzog of Smith Barney. The bottom line for retailers could be lower margins.
According to the New York-based investment firm's proprietary survey of wholesalers and retailers, The Smoke Scene, growth of the smokeless-tobacco category still appears to be strong; 88% of retailers and 73% [image-nocss] of wholesalers believe sales for smokeless-tobacco products have been increasing, and 67% of retailers and 74% of wholesalers think this stronger growth is sustainable.
However, it is important to note that over 40% of retailers and 50% of wholesalers believe this stronger growth is due to the lower-priced brands that have been introduced into the market by the major manufacturers, the survey notes. Also, the majority of retailers (75%) have seen evidence of these lower-priced brands stealing share from the premium smokeless-tobacco brands, particularly [the] Skoal brand manufactured by United States Smokeless Tobacco Co. (USSTC), and 74% of wholesalers have seen an increase in incidence of downtrading.
That's no surprise when one considers the recent introductions of lower-priced products from both USSTC (the Husky brand) and Swedish competitor Swedish Match (Longhorn).
Herzog, who is recommending clients sell their shares of USSTC stock, said the practice of relying on value-priced brands will erode the companies' financial strength. We believe downtrading will likely continue, and USSTC's operating margins will continue to be squeezed, she said.
While USSTC is the only public smokeless-tobacco company in the U.S. market, Herzog added that management at Swedish Match noted in its first-quarter results that all this historically strong category growth was driven by value-priced products while the market for medium and premium products was essentially flat.
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.