NEW YORK -- Now that the deal between Reynolds American Inc., Winston-Salem, N.C., and Lorillard Inc., Greensboro, N.C. is official, the Newport cigarette brand has joined the Reynolds portfolio. But that’s not the only change retailers might face in wake of the landmark merger.
Wells Fargo tobacco analyst Bonnie Herzog anticipates the deal might prompt changes to Reynolds’ Every Day Low Price (EDLP) program. The voluntary retail program grants participating retailers promotional allowances for Camel and other brands in exchange for aggressively pricing, thus enabling Reynolds “surgically manage its relative price gap between Camel and Pall Mall to optimally manage and ultimately prevent downtrading between Camel (and other premium brands) and Pall Mall (and other discount brands),” Herzog wrote in a research note.
Herzog went on to point out that many retailers have been opting out of the EDLP program. Participation is down to 60%, perhaps because of the requirement that retailers utilize EDLP pricing in all locations (vs. Altria’s Marlboro Leadership Price program, which now allows retailers to pick and choose which stores participate).
As such, Herzog believes Reynolds will add Newport to its EDLP program, not only to manage price gaps and accelerate share gains, but to also entice retailers to participate in the program.
“If RJR includes Newport in its EDLP program and/or possibly changes its program so retailers can implement EDLP pricing on a store-by-store basis, retailers should have a greater incentive to join,” she wrote. “This would enable Reynolds to more tightly control/manage its growth brand pricing structure, ultimately driving greater market share and profitability overall and importantly accelerate growth for Newport.”
In a recent “Tobacco Talk” retailer survey, Wells Fargo found that nearly 60% of retailers believe Newport will be added to the Reynolds EDLP program, over 65% anticipate Newport will grow faster if added to the program and more than half said EDLP participation will increase if Newport is added (though Herzog noted that many said they’d have “no choice” but to participate, given how important Newport is).
Even if Reynolds chooses not to add Newport to its EDLP, Herzog is optimistic about the brand’s potential under Reynolds’ management.
“We believe Reynolds’ superior execution at retail will enable it to drive faster share gains for Newport,” she said.
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