Reynolds Seeks Success In 'Total Tobacco Space'

Uses annual Investor Day to outline innovations in smoke-free markets

Melissa Vonder Haar, Freelance Writer

WINSTON-SALEM, N.C. -- It's no secret that cigarettes, while on the decline, are still the key driver in tobacco sales. Reynolds American Inc. recognizes this and as such, will continue to devote 80% of its brand support budget and 90% of its other resources (such as research and development) on combustible products; however, as Reynolds president and CEO Daniel Delen shared on Monday's annual Investor's Day, the company's pioneering efforts on smoke-free products will set Reynolds up for long-term success in the total tobacco market.

"Everything we're working on from an innovation standpoint has a higher margin than cigarettes," Delen said, noting the company's recent forays into snus, electronic cigarettes and nicotine replacement therapy (NRT). "I think we're very well positioned in an evolving market."

While Reynold's Camel brand volume has declining at higher rates than the industry average of 3% per year, these emerging markets present a growing, high-margin opportunity. And it's an opportunity Reynolds plans to take advantage of by establishing itself as an industry leader early on. Camel Snus, for example, carried 80% of the U.S. snus market and has seen annual volume increases of 8% to 10% per year.

"Looking at Camel Snus, the story continues to be a good one, showing how a combination of strong brand, a superior product and a focused marketing plan can create a winning formula," said Andrew D. Gilchrist, president and chief commercial officer of RJ Reynolds Tobacco Co., a subsidiary of Winston-Salem, N.C.-based Reynolds American.

Reynolds also hopes to become the first tobacco company to establish itself in the NRT market--a market the company noted has been monopolized by pharmaceutical companies who do not address the needs of the average tobacco consumer. In an effort to bring Reynolds' innovation to the NRT category, the company introduced its first NRT product, Zonnic, in limited markets this past September. Instead of being sold in drug stores, Delen said Zonnic would largely be marketed in convenience stores with a similar price point to cigarettes.

And although Lorillard is technically the first big tobacco company to enter the e-cigarette market, Reynolds believes its new "digital cigarette," Vuse, is well positioned to be a standout in the nascent segment.

Delen said that, unlike other e-cigs on the market, Vuse is truly "digital" (as opposed to electric), using computer chips to more closely mirror the smoking experience; further setting Vuse apart is the fact that it is produced domestically, as opposed to in China.

"We're not looking to make a little splash in the category," said Delen of Reynolds' e-cig strategy. "We're looking to make a big splash in the category."

Ultimately, Delen wanted investors to know such innovative efforts by Reynolds will set the company apart in the future of the total tobacco category and that "this ship is going to come into balance."

"I really do believe at RAI … innovation is our strong suit," he said. "These new product formats offer significant growth potential for RAI. It addresses shifting consumer preferences that are essential for long-term sustainability of the total tobacco space."