The DSD Gambit

Imperial Tobacco Canada to offer direct-store delivery to retailers

MONTREAL -- Imperial Tobacco Canada said that beginning in late-August 2006, it will offer direct-store delivery (DSD) of its products to retailers across Canada. Currently, its products are sold to retailers through licensed wholesalers. Under DSD, retailers who wish to do so will place orders directly through an Imperial account representative or continue to do business with their current wholesalers.

"In recent years we have undertaken measures to become more efficient in an increasingly competitive and challenging environment," said Benjamin J. Kemball, [image-nocss] president and CEO of Imperial Tobacco Canada. "[DSD] is the logical next step. DSD will enable us to be more effective at managing our products from manufacture to delivery and in protecting our competitive position."

This strategic decision will create close to 1,000 new job opportunities for Canadians through direct positions at Imperial Tobacco Canada and through the company's association with transportation, information technology and warehousing partners, the company said.

"We will work throughout the summer with our retail partners and key accounts to ensure the flawless execution of this complex initiative," added Kemball.

DSD is a proven system of distribution in many other product categories such as beverages and snacks, said the company. Montreal-based Imperial Tobacco Canada will be the first tobacco company in Canada to implement this system for tobacco delivery at a national scale.

According to The Montreal Gazette, the company's cigarettesincluding du Maurier, Player's, Matinee and Cameoare now distributed by 90 licensed wholesalers to 42,000 retailers. Shop owners will be able to continue using the wholesalers if they wish, but buying directly from Imperial will cost less, the report said.

The company could not say how large the savings would be, nor if those savings would be passed on to consumers. It's up to retailers to set prices, Rahul Prakash, Imperial's vice-president for marketing and development, told the newspaper.

Imperial's decision to deliver its products directly to retailers is likely to jeopardize several small and medium-sized Canadian convenience store distributors, according to the National Convenience Stores Distributor Association (NACDA). Most of these distributors are family-owned small businesses, which have been in operation for many years. They oversee the distribution of products, including tobacco products, throughout Canada.

"We are surprised and disappointed by Imperial Tobacco's decision. While we have been partners for more than 100 years, we have learned about this decision by means of a press release [Tuesday]. Yet, an important part of our distributors' sales comes from the distribution of tobacco products. Some of them will find it difficult to make good the important losses brought about by ITC's decision, said NACDA president Marc Fortin.

According to NACDA, ITC's decision is likely to result in the loss of thousands of jobs in the distribution industry throughout Canada, in addition to creating an upward pressure on the price of other products sold in c-stores and grocery stores. "Furthermore, the distributors ensuring the delivery of products to Canada's regions are likely to be affected the most. Ultimately, we are concerned that these regions will pay dearly for [ITC's] new strategy, since some wholesalers who serve remote areas may not be able to survive, Fortin added.

Francis Thompson, a policy analyst with the Non-Smokers' Rights Association, which tracks the tobacco companies, said he suspects the savings might be shared by consumers and retailers. Imperial, like other large manufacturers, has had to contend with the rapid rise of discount brands of cigarettes, he told the paper. Imperial has introduced a few discount brands of its own, he said, but the profit margins on discount brands is only a fraction of the margins on premium brands. So it might be trying to boost sales of its premium brands.

He also said he suspects Imperial is trying to boost the profit margins of retailers, hoping they will be friendly to the company and help it fight legislation that would ban wall displays in stores by 2008.

Manon Genest, spokesperson for the Canadian Council of Grocery Distributors in Quebec, told the Gazette if the distributor serves large grocery stores, the impact will be small, but those serving convenience stores will feel it far more.

Kemball sait the move will also help the company guarantee freshness. The startup costs will be significant, he said, but the company will make the money back over time.

The company, a subsidiary of British American Tobacco, closed its Montreal production plant in 2004 and transferred the work to Mexico.

The company also mothballed plants in Ontario last year, saying its cigarette sales in Canada had dropped to 20.5 billion in 2005 from 32.7 billion in 1994.

Kemball said the change in delivery systems was not a response to increased smuggling, which he said was spurred by the high taxation on cigarettes and criminal networks. No amount of efficiency on our part is going to allow us to compete with smuggling, he told the paper.

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