NEW YORK -- One of the biggest tobacco stories of 2015 has been the acquisition of No. 3 tobacco player, Lorillard Inc., Greensboro, N.C., by No. 2 player Reynolds American Inc., Winston-Salem, N.C. As 2016 looms on the horizon, one of the biggest questions is how this “new” Reynolds will perform.
RBC Capital Markets tobacco analyst Nik Modi’s take: the company will get even bigger.
“From a geographic standpoint, the portfolios of Reynolds and Lorillard are obviously very complimentary,” Modi said during last month’s CSP/Swedish Match-sponsored Tobacco Update Webinar. “When you think about the broader sales coverage Reynolds has [and] the fact that Reynolds is picking up about 50,000 urban retailers, where Newport had a lot of cachet, there’s a lot of potential cross-sale opportunities.”
“The question becomes, will the brands translate?”
Though the merger went through in July 2015, Newport was not added to Reynolds’ Every Day Low Price (EDLP) program until November, and a provision of the merger included a standstill agreement in which Reynolds cannot expand its retail space requirements for a set amount of time. In other words, we haven’t even begun to feel the full effects of the merger.
What we do know is that after just one quarter with Newport in its portfolio, Reynolds was able to grow the brand’s share by 3%—and that was without including the brand in its contracts.
“We’ll see what the uptake in the EDLP program is (after adding Newport),” Modi said. “That in itself should help, particularly with Pall Mall.”
The performance of the other player in the Reynolds-Lorillard deal—the newly formed ITG Brands LLC, Greensboro, N.C.—is another unknown for the New Year. The new Big Tobacco player acquired a number of brands divested from Reynolds and Lorillard, including Winston, Salem, Kool, Maverick and blu e-Cigs in a $7.1 billion transaction.
How ITG will do with these new brands remains to be seen.
Modi anticipates the company will attempt to maintain and grow share through heavy promotions, at least in the near future.
“They have a very targeted and specific promo and buy-down plan that I actually think could work,” he said. “Let’s see what happens.”
Regardless of if the strategy works, don’t hold your breath on Reynolds and top-dog Altria Group Inc., Richmond, Va., reacting.
“I don’t think Winston, Kool or Salem are big enough to disrupt the pricing environment,” Modi said. “At the end of the day, Marlboro is really the one that can upset the apple cart from a promotional standpoint.”
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