OTP Analysis

Entry of RJR, PM among top category interests

NEW YORK -- Recent moves by R.J. Reynolds and Philip Morris USA into smokeless tobacco products gave retailers attending the CSPNetwork CyberConference on tobacco this past Tuesday something to chew on.

The entry of major players into other tobacco products (OTP) via acquisition and product introduction was inevitable, according to Bonnie Herzog, a tobacco analyst for Citigroup, New York. Herzog, the session's lead presenter, told retailers present that growth in OTP sales, the increase of smoking bans in public places and the need to offer consumers [image-nocss] an alternative to cigarettes all play into why the major cigarette makers have moved into the category. [To view an OnDemand replay of the Tobacco Update CyberConference ($49), click here.]

Just last month, Reynolds American Inc., parent of Winston-Salem, N.C.-based RJR, purchased Memphis, Tenn.-based Conwood, the second-largest producer of smokeless products. On the heels of that news, RJR, Richmond, Va.-based PM USA and Greenwich, Conn.-based United States Smokeless Tobacco Co. (USSTC) all announced plans to introduce new, competitive products.

Commenting on the steps manufacturers are making, Herzog noted that PM USA is taking a cautious approach with its new product, Taboka, by not leveraging their popular Marlboro franchise name with it and by releasing the product initially in a limited fashion. On the RJR side, Herzog said the big question is what Reynolds will do with Grizzly, one of Conwood's most recognizable products. She said RJR will more than likely leave the product alone, but noted that if the company did decide to increase pricing, that would encourage the prices of discount brands to rise. Which is good news, she said.

Herzog also bandied about the potential that PM USA would buy USSTC. She discounts the notion. If I were PM management, I'd wait for the price to go down on USSTC, she said. If the stock price becomes more attractive, then I'd think about it.

Commenting on taxes, Herzog mentioned that current efforts in California and Texas may have an impact on the weighted average of taxation the category currently faces, but that overall, phase-in plans would make any real threat unlikely.

On the topic of smoking bans in restaurants and bars, she said that these were likely to spread, but that smokers learn to adapt and simply change their habits with regards to where they smoke.

Looking to the future, Herzog said pressures from regulation, litigation and consumer demand will force manufacturers to innovate, especially with OTP. Innovations such as the development of safer product may ultimately drive volume. She said that in time, the market will become more compatible with a smokeless format. Over the next 20 years, the number of smokers will decline, but the number of smokeless users will increase.

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