NEW YORK -- In the third quarter 2015 results of Wells Fargo’s annual “Tobacco Talk” survey, convenience store retail and wholesale respondents continued to express enthusiasm about the state of the overall combustible cigarette environment.
The majority of retailers said they believe sales will remain strong for a variety of reasons, including: a “renaissance” in combustible cigarette sales, with volumes down just 0.9% in the third quarter; consumers continue to uptrade to premium brands thanks to an improved economy and lower gas prices; the dissatisfaction many consumers are having with e-cigs, prompting them to switch back to combustibles; and a “stable competitive environment” for the time being.
“Our retailer contacts observed increased foot traffic for in-store purchases,” Wells Fargo analyst Bonnie Herzog wrote in a research note. “(They) indicated a greater propensity for consumers to ‘indulge’ in premium branded merchandise and higher in-store purchases during Q3 given higher disposable income.”
But it wasn’t all good.When asked what effect Reynolds American Inc.’s acquisition of the Newport brand and the formation of ITG Brands will have on the competitive environment and pricing, 46% of respondents predicted a negative impact, 26% predicted a positive impact and 28% anticipated no impact.
“(The) outlook is pretty negative for ITG Brands as power shifts to a Reynolds and (Altria) duopoly,” Herzog said.
Here’s a look at what else survey respondents had to say about the new Big Three.
Reynolds: Leveraging Newport for EDLP Success
No surprise, retailers believe Reynolds will benefit most from the post-merger environment—especially once Newport is officially added to the company’s Every Day Low Price (EDLP) program on November 16th. The move will likely up retailer participation (which is currently around 60%).
“This should enable Reynolds to more tightly control/manage its growth brand pricing structure as well as gain incremental space for Newport, which could ultimately drive greater market share, profitability, and accelerated growth for Newport as well as Reynold’s entire portfolio,” said Herzog. “Our retailer contacts expect Newport will gain around 0.76% of incremental share under Reynold’s ownership.”
Altria: Soft, For Now
Retailers were uncertain about how Altria Group Inc. would respond to the new requirements of Reynolds’ EDLP. For the time being, it looks as though the No. 1 players’ momentum has stalled a bit: Marlboro sales decelerated in the third quarter (up just 0.5% vs. a 3% increase in Q2).
Still, retailers and Herzog both expressed positivity around the launch of Marlboro Midnight and a new mobile app.
“Retailers are broadly encouraged by Altria’s new Marlboro Midnight, a menthol which will likely be targeted to a younger demographic,” Herzog said. “Also, we’re encouraged by Altria’s plans to leverage digital media with its new Marlboro app.”
ITG: A Tough Road
“Over 50% of retailers believe ITG will lose cigarette share primarily due to lack of focus given too many brands and Reynolds and Altria’s position of power,” Herzog said. “Further, the bulk of our contacts predict an uphill battle for blu to succeed under its new ownership.”
However, Herzog reported that retailers “overwhelmingly believe” the newly formed ITG Brands will be aggressive when it comes to promotions on its acquired brands in order to “gain consumer, visibility and retail space,” especially for Winston.
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