Tobacco

USSTC Bullish on Pricing, Promotions

Programs coincide with new product, line extension launches

STAMFORD, Conn. -- U.S. Smokeless Tobacco Co. (USSTC) is downplaying a financial analyst's report that the Stamford, Conn.-based tobacco maker's heightened price-promotional strategy at retail during the first quarter could "impair" its profit margins.

In a March 28 analyst note, Deutsche Bank Securities Inc. speculated about whether USSTC, a subsidiary of UST Inc., could "sustainably raise dollar profit growth by recapturing (market) share, or if margins will be too heavily impaired" in the wake of first-quarter price promotions and discounts. During the quarter, USSTC engaged in "more [image-nocss] value packs, deeper buydowns and aggressive pricing behind the Skoal Edge rollout," stated the Deutsche Bank report titled "More discounting…accelerant or threat?"

Examining the consumer tobacco market, Deutsche Bank research analysts Andrew Kieley and Marc Greenberg noted that "after speaking with smokeless distributors, we believe UST has stepped up its price-based promotions (in the first quarter) to further narrow price gaps."

The analysts noted that "competitors appear increasingly concerned about UST's pricing tactics," and the analysts recommended maintaining a "hold" on UST stock. The bank said it was "slightly adjusting revenue estimates, but not changing our $0.80 EPS estimate, as more aggressive pricing could drive volume acceleration."

In addition, Deutsche Bank asked, "[If] UST does meaningfully retake profits from discount competitors, will it destroy the fragile industry pricing stability which emerged in 2007?"

Andrew Lee, a spokesperson for USSTC, said retail activities during the quarter coincided with the company's launch of new products and line extensions, including Skoal Edge and a new smokeless tobacco brand, Cope. "Everything we do is carried out to grow the moist tobacco category. We feel strongly about our partnership with retailers: Our interests are aligned with the interests of these trade partners; they're a part of the value proposition," Lee told CSP Daily News.

Lee said the company didn't wish to comment on the Deutsche Bank report, regarding it as "speculative." He said the company wasn't concerned about the specter of lagging profits stemming from its aggressive first-quarter retail promotional push.

In late March, USSTC rolled out the first nationwide integrated marketing promotion surrounding the company's newest moist smokeless tobacco line, Cope. Lee said that while the Copenhagen brand depicts the West and adventure-seekers who ride by horseback, Cope is taking a similar yet evolutionary approach as it caters to adventure-seekers who prefer to ride motorcycles.

Using a variety of marketing platforms, the new "Cope Chop Shop" promotion is expected to generate high levels of brand interaction and excitement for the entire Cope sub-line, which includes Straight, Smooth Hickory and Whiskey Blend Flavor varieties, said Lee.

Cope, which was introduced last year, represents a "new breed of rebel" within the Copenhagen brand, said Lee. On March 10, the Cope Chop Shop became available to age-verified adult consumers at www.FreshCope.com/ChopShop. At the website, consumers can design and build virtual custom motorcycles and win trips to some of America's legendary bike destinations, including Sturgis, S.D., which hosts a motorcycle rally every August.

In its analyst note, Deutsche Bank commented that it "continues to believe UST shares have a reasonably secure floor from ongoing speculation of industry consolidation, but valuation in the $56 range appears fair—absent signs of a substantial upturn in tobacco profit growth."

The bank was making only "minor estimate changes" for the short term, with the modification showing higher volume growth by UST in the 4.5% to 5.5% range—assuming promotions prove effective, states the analyst letter. "Although c-store traffic has been falling sharply, contacts indicate relatively modest positive volume trends for UST," it stated.

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