OAKBROOK TERRACE, Ill. -- Last week, Wells Fargo analyst Bonnie Herzog speculated that a deal between Reynolds American Inc. and Lorillard Inc. was moving forward, describing the very likely acquisition as “a value creating transaction for both Reynolds and Lorillard shareholders" (read the full story here). It is less clear whether such a deal would benefit tobacco retailers.
In a recent exclusive CSP tobacco survey, retailers were divided not only on their support (or lack of support) for a Reynolds-Lorillard deal, but also on how the potential merger might affect their tobacco business.
About 48% of retailers surveyed expressed support of a Reynolds acquisition of Lorillard. While they cited streamlined contracts and fewer products and sales reps to deal with, most supporters expressed hope that a merger to the No. 2 and No. 3 tobacco companies would put some pressure on the industry-leading Altria Group.
“I support it because Altria has had way too much control for far too long as it relates to the c-store industry,” said one supporter. “Maybe if Reynolds and Lorillard combine, they will have enough (power).”
“This will hopefully give some real competition to Altria and force them to quit trying to control the largest sales category that we have in the c-store industry,” wrote another respondent.
Opponents, however, argued that a combined Reynolds-Lorillard player would control too much of the market and could wreak havoc on retailers’ tobacco businesses. Additionally, most of the 39% of respondents who opposed the deal expressed concerns on how the acquisition might change how Lorillard does business.
“Lorillard has always been Switzerland,” wrote an opponent. “Their culture has provided us with genuine consultants.”
“Cigarette companies already have too much power over the retailers,” added another. “Lorillard has been relatively retailer friendly--that will be lost in the merger.”
And 13% of retailers surveyed said they were neutral about a deal, with one respondent commenting “my business will continue as normal, with one less cigarette company to deal with.”
Retail Impact
Respondents were even more divided on whether a deal between Reynolds and Lorillard would have any effect on their tobacco business: 37% said it would have a positive effect, 33% predicted it would have a negative effect, 15% believe there would be no effect and 15% were unsure.
The reasoning behind a hopeful outlook included increased promotions, better pricing and possible growth for the total category. Retailers who expressed optimism over the deal’s impact on their tobacco business also noted that it would be easier to deal with two tobacco companies as opposed to three.
“As the category declines I think it will be better to deal with fewer large companies,” wrote a respondent. “I know that sounds contrary to creating a strong competitive atmosphere, but we will need vendors that can put strong financial support behind the category going forward not just for combustibles but for innovation as well.”
Retailers who said the merger would negatively affect their business argued that fewer players would put even more power in the hands of Altira and the combined Reynolds and Lorillard forces--and out of the hands of retailers.
“With less options, they'll think they deserve more space in the store,” said one retailer.
Or, as one opponent summed it up, “the cigarette companies are already responsible for the decline of what used to be our No. 1 category. Consolidation will only increase their margins and reduce ours.”
Coming up in CSP Daily News, retailers speculate on what a Reynolds-Lorillard merger might mean for both the cigarette and electronic cigarette segments, as well as Lorillard’s industry-leading blu.
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