Lorillard's Five Key Questions

Execs explainbasis for strategic plan during analyst meeting

Linda Abu-Shalback Zid, Senior Editor

Lorillard (CSP Daily News / Convenience Stores / Tobacco)

NEW YORK -- In developing Lorillard Inc.'s strategic plan, CEO Murray Kessler told participants in an analyst meeting last week that the company worked to answer five key questions.

The five questions were:

Can we sustain our core business success?
Kessler defined the company's core business as being "pure cigarette play in a very narrow area, within menthol." He added that being so focused while competitors are more diversified was a "double-edged sword." He said, "It's one of the key drivers in our success, but it also shows there's a lot of white space in [image-nocss] the category for us."

Kessler said the brand has grown in the last decade from an 8.7 share to a 12.9 share, while domestic cigarettes continue to decline. "We're not gaining share by stealing competitor share, we're gaining share by staying stable and the rest of the category declining around us." He pointed to the company's different tobacco blends, papers, strength levels and satisfaction levels as key contributorsand said that the company plans to stay the course in product strategy, messaging and promotion. "So all in all, the stability in a declining industry, in our belief, should allow Lorillard to continue gaining market share."

Can we grow beyond our current core business?
Kessler looked at several examples of potential opportunities. The first was in expanding the company's share west of the Mississippi. He said the company traditionally hasn't promoted in many markets in that area, meaning customers there pay 70 cents to a dollar higher per pack. They have recently tested promoting in some of those markets, and found share did grow.

Another opportunity he outlined is improving non-full-flavor menthol (formerly known as lights). While trial has been decent, he said, usage levels are dramatically lower, "which generally says it's a product problem." He said there are several differences between Newport non-full-flavor menthol and competitor products. "It's a question of product development and understanding why we're not as good at making a non-full-flavor cigarette. So this one will take us some time, but it's clearly an opportunity."

He also spoke of the company's recent introduction of Newport Non-Menthol cigarettes. While the product has come with a $1 discount to encourage trial, he said a recent study found that 68% of consumers said they made the cigarette their regular choice. Bringing the price to premium level, Kessler said, will add to profitability.

He also addressed the company's current stance on other tobacco products, saying the company sees "no immediate need or strategic imperative" to enter the cigar or moist smokeless tobacco categories. "I don't rule anything out," he said. "I'm the kind of person who experiments and innovates and tests and sees if we can do something uniquely different. But today as I sit here, this is something that we might be able to do, or we might want to do. It's not something we have to do."

Do we have the capabilities to pursue additional growth opportunities?
For this question, Kessler said the company has some work to do. Lorillard has put in place a process where "ideas flow up in the organization," with senior management acting as bankers and teams within the organization working together to earn the rights to launch new ideas.

The company has also brought on a senior vice president of regulatory compliance, a director of product development and a director of new products marketing. "To me, people make the difference to bring the strategy to life, and we are bringing in talent to make that happen," Kessler said.

Will the litigation or regulatory environment impact this potential?
Ronald S. Milstein, senior vice president of legal and external affairs and general counsel, said that filing of individual cases has "reduced dramatically." And as for the FDA's examination of menthol cigarettes, which represents 85% to 90% of Lorillard's business, he said, "We continue to believe that the best scientific evidence does not support an assertion that menthol should be regulated any differently than non-menthol cigarettes."

Can we continue to deliver industry-leading returns?
David Taylor, chief financial officer, said that in 2010, net sales increased 13% to $5.9 billion dollars, driven by a 5% increase in unit volume. He added that there is not a lot of fat or waste in Lorillard's structure. He said, "Going forward, our core business will be key for financial performance. We know what got us here."