OAK BROOK, Ill. -- Word of two of the world's largest tobacco companies joining forces has some U.S. convenience retailers battening down for what they perceive as the resulting fallout. "I think it's unfortunate," Janice Ferguson, vice president of Pacer Fuels, a 10-store chain based in Austell, Ga., said of yesterday's announcement that Philip Morris USA parent Altria Inc. had reached a definitive agreement to acquire all outstanding shares of UST Inc., maker of top-selling moist smokeless tobacco brands Copenhagen and Skoal.
For Ferguson, the transaction echoes Altria's late-2007 acquisition [image-nocss] of cigar manufacturer John Middleton Inc., which has since fallen under the auspices of Richmond, Va.-based Philip Morris. That acquisition, she believes, gave Philip Morris the ability to demand from retailers more back-bar space in the cigar category. She and others fears the same could happen in the moist-smokeless tobacco, thereby taking some of the luster off what has been among the most promising of all tobacco segments.
"If they attempt to have the same personnel marketing at store level the Philip Morris cigarettes, John Middleton cigars and UST moist products, that's not going to work," Ferguson told CSP Daily News. "UST has been a strong marketing company, and I don't know what Altria could bring to the table. The big question for me is: Is Altria going to run it or is Philip Morris going to run it?"
Justin Alford, co-owner of B-Quik, Baton Rouge, La., had been helping his company recover from the wrath of Hurricane Gustav, when word of this new storm began brewing. "I'm optimistically cautious as to whether there could be something good in the deal, but having fewer players is not always a good thing," said Alford, whose company operates three convenience stores and five car washes. "Philip Morris is so strong and so dominant.… I'd hate to see that kind of dominance carry over into the smokeless tobacco business."
Ferguson and Alfred are not alone in their views. Of the more than 125 retailers who responded to yesterday's Kraft/CSP Daily News poll question asking if the acquisition would be good for retailers, 50% or more believed it would not.
At least for the immediate future, however, such discussion is immaterial. The transaction still has to undergo a regulatory review and pass a vote by UST shareholders. When those steps happen has not yet been determined. "At this point in time, it's very early in the process," said Altria spokesperson David Sylvia. "We haven't had time to think about the plans for what happens next."
What is known is that the deal, valued at $11.7 billion including $1.3 billion of debt, gives the tobacco giant a portfolio of brands that dominate more than 50% of both cigarettes and smokeless markets.
In Monday's call to investors, Altria chairman and CEO Michael E. Szymanczyk called the acquisition "strategically compelling and financially attractive" for several reasons. Company executives believed that the acquisition would lead to reduced selling and corporate expenses that would generate annual synergies of $250 million by 2011 and, more importantly, give Altria "immediate national scale" in the other-tobacco-products (OTP) business.
Altria has worked to grow its smokeless business, especially after spinning off its overseas tobacco business—Philip Morris International—earlier this year. It was that sale that prompted Szymanczyk to pursue the on-again/off-again deal with UST, he said during the investors call. Apart from UST, Altria has been testing a number of noncigarette tobacco products, including Marlboro Moist Smokeless Tobacco and Marlboro Snus spitless tobacco.
But it's that experience that has retailers such as Ferguson concerned about what lies ahead. "Philip Morris has not demonstrated that they know very much about the OTP business, as has been evidenced by way they've handled Marlboro Moist," she said. "They never should've put the Marlboro name on a less-than-premium product."
Steve Montgomery, president of b2b Solutions LLC, Lake Forest, Ill., believes the absorption of UST's expertise and stable of top-selling brands—its Skoal and Copenhagen brands alone have a combined category share of almost 50%—will ultimately determine the fate of Marlboro Moist. "It would probably fold in and it may go away, but there's no way of knowing that yet," he said. "It won't remain in test. But if you think about it, with the distribution system UST has, it may actually be a way to extend the Marlboro brand."
The Altria-UST deal could also spark a sort of competitive arms race among other top tobacco companies, according to a tobacco category manager for a large chain on the West Coast, who commented on condition of anonymity. "This will probably lead to more consolidation down the line," the category manager said. "I'm concerned they're going to take over and not be a team player with whoever is left. Right now I don't see anything positive from this."
Media reports have speculated that competitors Reynolds American Inc., Winston-Salem, N.C., and Swedish Match North America, Richmond, Va., have their eyes on potential acquisition targets, though neither company could confirm such reports. Analysts speculated that Altria's deal might prompt Reynolds American to respond by making a bid for Greensboro, N.C.-based Lorillard Tobacco Co., the other major American tobacco company, said The Wall Street Journal.
In a way, Altria is playing catch-up with Reynolds American, the report added. In 2006, Reynolds bought Conwood, the second-largest maker of smokeless tobacco products after UST, for $3.5 billion.
Lennart Freeman, president and CEO of Swedish Match North America, could say only that he believed further industry consolidation has the ability to "strengthen and expand the smokeless category."
"There has been speculation surrounding Altria's purchase of UST for quite some time now, so this does not come as a surprise," said Freeman. "UST is an established player in the U.S. market and we also expect Altria will be an aggressive competitor.… Swedish Match continues to stay focused on our business, promoting and developing our brands. From our perspective it will continue to be business as usual."
A spokesperson for Reynolds American could not comment on the Altria-UST deal, but cited his company's ability to grow its own moist-smokeless business under Conwood. Its Grizzly brand, for example, was introduced in 2001 and today represents almost 25% of the total moist-snuff market, according to John Singleton, director of communications for Reynolds American. One retailer interviewed for this story cited Reynolds' "keeping the two companies separate" as a reason for such success.
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