Reynolds' Road to Recovery

Cigarette maker not out of woods yet on out-of-stock issue

CHARLOTTE, N.C. -- Even as Reynolds American Inc. was touting improvement to its market share in a discussion of its third-quarter profits this week, retailers and wholesalers were continuing to deal with the company's out-of-stock issues, although most agree the issue is getting better.

There had been problems, and the problems were unfortunate and consequential for sales, Roger Grogman, corporate marketing vice president for wholesaler McLane Co., told CSP Daily News yesterday. But we're getting close. We certainly have improved significantly, but [image-nocss] we're still experiencing some out of stocks.

This summer, Reynolds American made a change to its computer system and ran into some packaging-material supply issues that created a shortage of some cigarette products, most notably Doral and GPC. The company continues to expect a complete resolution of the issue by the end of November.

Reynolds spokesperson David Howard said the company has been running its plants overtime for months in an effort to get back where it needs to be. We believe that all inventories should be where they need to be come mid- to late November, he said.

Brandon Hoffman, marketing manager for The Parker Cos., a Savannah, Ga.-based convenience store retailer, agreed the problem is slowly being resolved. It's still a problem, but not as big as it had been at the onset, he said.

Hoffman, who gets his Reynolds cigarettes through Temple, Texas-based McLane Co., said there were three weeks in September that were particularly difficult. At that time, almost 60% of the 145 respondents to a Kraft/CSP Daily News Poll said they had experienced a shortage of Reynolds products, and another 11% said they expected to have problems.

For Grogman, the best course of action to take has been to keep retailers informed.

We can do nothing but keep them advised of the situation, he said. We can't ship something that we're unable to procure ourselves. We recognize that our relationship with Reynolds is a very good one and we're a very large purchaser of their products. And we have an understanding of the inconvenience that has been unfortunate for them as well as for our customers. We've taken every effort to secure every stick of product available and still had out of stocks. It's a situation that will not be out of our perspective for a while.

On Wednesday, Reynolds reported its third-quarter profit jumped 45%, according to Reuters. The Winston-Salem-based tobacco company said the profit came as its Camel and Kool cigarette brands and Grizzly moist-snuff brand increased their market share. Net income climbed to $309 million, or $1.05 per share. That's compared to from $2.3 million or 72 cents per share a year ago.

Tobacco stock analyst Bonnie Herzog of Citigroup, New York, questioned Reynolds' downplaying of the out-of-stock issue. Given ongoing supply shortages, we believe this issue could negatively impact the company's volume for the remainder of the year, Herzog wrote in an investors' note. According to our industry trade contacts, Reynolds' supply chain issues have resulted in large out-of-stocks at retail, thus forcing consumers to try new products. Because cigarette consumers are typically very loyal consumers and rarely purchase alternative brands, we believe the out-of-stock issue that Reynolds is facing may cause the company to lose some of its core consumers as they are forced to try a competitor brand.

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