NEW YORK -- Philip Morris USA's Marlboro Snus will be a hit, according to Citigroup tobacco analyst Bonnie Herzog in her most recent research report, which details the results of the firm's proprietary tobacco trade survey of wholesalers and retailers.
The majority of the firm's industry trade contacts said they believe PM USA was very smart to leverage its Marlboro brand for its new smokeless product and made the right decision by entering the smokeless category via a snus product. Almost all (97%) of the survey respondents indicated they will carry [image-nocss] Marlboro Snus when it is available to them.
The survey also showed that UST could suffer most from the national roll-out of Marlboro Snus. Over half of our respondents believe UST will face the greatest negative impact from Marlboro Snus; however, many respondents also believe [Reynolds American Inc.'s] Camel Snus could be hurt by PM's new product, Herzog said.
About 64% of the survey respondents do not believe snus products will have an impact on cigarette volumes. The trade believes that snus will be consumed in addition to cigarettes. Given the increased bans on smoking, snus products seem like an obvious substitution, said the report.
More than 50% of the respondents anticipate that Marlboro Snus will command premium pricing, that it will be priced close to a tin of premium moist smokeless, such as Skoal. Most said they believe the snus category will grow with the introduction of additional brands, and believe Marlboro Snus will attract more smokers to the smokeless segment.
A few of respondents were concerned that should Marlboro Snus fail, this might tarnish the Marlboro brand name, as it would be associated with a bad product. However, we believe that [PM USA] would not be introducing a snus product under its Marlboro brand had it not been fully comfortable with the quality of the product and the anticipated future demand for the product, said Herzog.
PM's test marketing of Taboka was simply in preparation for the eventual launch of Marlboro Snus and provided the company an opportunity to gain more knowledge into consumer taste preferences and demands prior to its eventual branding of Marlboro Snus, she added. Additionally, the brand equity behind Marlboro cigarettes is one of the strongest in the world among any consumer product, and given that the smokeless segment is still very much removed from the smoker's world, we do not believe a potential failure by [PM] with the launch in an initial test market for Marlboro Snus will have a significant negative impact on Marlboro's cigarette volumes.
Herzog points out, too, that the snus conceptmost popular in Swedenis foreign to U.S. tobacco consumers, and it could time to educate American consumers on what snus is and how to use it. Snus does not require the user to spit because the pouch is tucked between the top lip and gum where very little saliva is produced. She said that some U.S. consumers have been putting the pouch between their bottom lip and gum like a traditional moist smokeless pouch product, requiring the consumer to spit more than if the pouch is placed properly.
Meanwhile, if in fact smokers are converting to moist smokeless premium brands such as Skoal and Copenhagen out of a lack of another product ultimately prefer Marlboro Snus and/or Camel Snus, we could see quit a significant impact on UST's volume, considering UST's management team routinely stresses that it has been receiving many new customers that are ex-smokers, and plan on focusing on smokers as an opportunity for growth. Additionally, UST is experiencing some nice growth in its moist pouch segment, which is most likely the result of smokers entering the segment; however, these pouches require a considerable amount of spitting, and while they are in a pouch, it is more than likely that smokers and moist pouch users will switch over to Marlboro or Camel Snus as a result of its spitless nature and based on the fact that most of the consumers probably previously smoked either Marlboro or Camel cigarettes.
Respondents said they believe that Marlboro Snus will take most of its share from Skoal and Copenhagen pouch brands.
Survey respondents were split almost 50-50 on how Marlboro Snus would be priced assuming it is rolled out nationally; 54% said they believe Marlboro Snus will be priced close to a tin of premium moist smokeless tobacco, while 46% said they believe that the new snus product will be priced in line with a pack of Marlboro cigarettes.
With regard to product placement, Herzog said the firm's contacts believe it will benefit PM USA to position Marlboro Snus next to its cigarettes, since it is trying to attract smokers.
Based on each product's brand equity, Herzog said she expects Marlboro Snus to be far more successful than Camel Snus. Additionally, because Marlboro smokers make up close to 50% of US smokers, and Camel smokers only make up approximately 7% of US smokers, this creates a huge advantage for PM's brand, given that snus is marketed to smokers.
Some 88% of respondents said they believe Marlboro Snus will have a greater market share than Camel Snus in one year following each products' national rollout. In addition to the superior brand equity that the Marlboro name provides PM's new snus product, it also has another advantage over Camel Snusit does not require refrigeration. Marlboro Snus is pasteurized, and therefore does not require refrigeration during transportation or at the point of sale. Camel Snus requires refrigeration, and must be placed in small refrigerators at the point of sale.
While this may seem like a potentially attractive marketing play to get the attention of consumers, it takes up valuable shelf space, and is also a big inconvenience to retailers and wholesalers, said Herzog; 78% of respondents said they believe that the required refrigeration of Camel Snus will be a disadvantage versus Marlboro Snus.
Given the prospects of increased smoking regulations and taxes, Herzog said she anticipates that there could be other entrants into the snus category once PM USA and Reynolds have spent the money to market their products and educate the American tobacco consumer on snus products. Swedish Match already produces snus with great success in Sweden, she said, and believes there is a great chance that Lorillard could rollout a Newport Snus or another branded snus product by leveraging Swedish Match's expertise in their current joint venture.
A Newport Snus would cater to the menthol smoker, an segment where Newport has the lion's share. Also, smaller companies entering the category with price-value brands, similar to moist smokeless with premium brands such as Skoal and Copenhagen doing battle with Grizzly, Husky, and other subpremium brands that have caused significant downtrading, she said.
Finally, Herzog said she believes Marlboro Snus stands to benefit from PM USA's distribution network and skilled sales force. The question is whether or not PM USA will have to spend more money to add to its existing sales force to handle the increased load of a new product and what training will cost; however, the majority of our survey respondents believe that PM USA will be adequately served by their current sales force, a very positive way to leverage its existing distribution capabilities, thereby limiting expenses, she said.
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