Competitive Edge for Reynolds-Lorillard?

Retailers express uncertainty over how merger would affect blu, cigarette segment

Melissa Vonder Haar, Freelance Writer

Reynolds American Lorillard (CSP Daily News / Convenience Stores / Tobacco)

OAKBROOK TERRACE, Ill. -- "Unsure" seems to be the most accurate description of how convenience store operators feel about the potential acquisition of Lorillard Inc. by Reynolds American Inc. A new CSP tobacco survey shows retailers are divided in their support of such a deal (with 48% for, 39% against) and whether a merger between Reynolds and Lorillard would be good for retailers (37% said it would be good for business, 33% bad for business, 15% predicted no effect and 15% were unsure).

Respondents were equally unsure about what--if anything--this deal would mean for Lorillard's leading electronic cigarette brand, blu: a 43% majority of respondents believe a merger would have a "neutral" effect on blu's sales, while 33% predict it would accelerate sales, 24% that it would slow sales.

Those who said a merger would improve blu's status made the case that, because blu is already the solid No. 1 e-cigarette player, Reynolds would put its weight behind the brand--especially with Altria preparing to take MarkTen national.

"This would put Reynolds in an e-cig leadership position and potentially help drive this category," one retailer wrote.

"Blu will most likely be worked into the backbar presentation instead of being on the counter," added another respondent. "With Vuse and MarkTen launching, and then adding blu, there would be a very nice visual presentation on e-cigs. I think that will help blu, as they are the leader today and I do not see that changing."

Retailers who suspect a Reynolds acquisition would decelerate blu's growth pointed out that Reynolds has already invested heavily in its Vuse electronic cigarettes (recently announcing plans to bring production stateside).

"It will probably have a negative effect on blu because Reynolds has their own e-cig product that they will concentrate on more," said one such retailer.

"Neutral" respondents also cited uncertainty over how a combined company would handle dueling electronic cigarette brands.

"While I think Reynolds knows it's a popular brand, I think we are only beginning the phase of 'only the strong survive' in the e-cigarette category," wrote a responder. "We still need to see what Reynolds will do with their Vuse brand."

Others argued that having both blu and Vuse in its arsenal could catapult Reynolds to the top of the e-cigarette game--perhaps at the cost of smaller, independent electronic cigarette players.

"Vuse and blu combined would be very strong," read one response. "It might be anti-competitive for the e-cig category."

Less Competition for Cigarettes

The one area retailers expressed any certainty was how a deal between Reynolds and Lorillard would affect the cigarette segment: 54% of surveyed retailers said it would reduce competition. As one such retailer said, it's simply math: "less manufacturers equals less competition."

This would be especially true for menthol if Reynolds added Newport to its portfolio.

"Menthol for everyone else would be lost cause," wrote a respondent.

Still, 24% of respondents suggested that a combined Reynolds and Lorillard could provide Altria with a strong adversary, resulting in "two heavyweights fighting it out."

Others who believe the deal might increase competition in the cigarette segment said that smaller players, such as Commonwealth, could step up marketing efforts to move into the No. 3 currently occupied by Lorillard.

Another 22% of retailers expressed even more uncertainty about a potential merger having any effect on the cigarette segment.

"It will reduce competition within the tobacco industry, but will probably not make much difference to the category from a retail standpoint because both companies have some strong brands," an "unsure" retailer wrote.

"This would just add Lorillard's market share to Reynolds' market share," said another. "I don't see anyone changing brands because of this since most cigarette smokers are brand loyal."