NEW YORK -- The 2015 “renaissance in combustible cigarettes” continued into the fourth quarter, according to the retail and wholesale respondents of Wells Fargo’s annual “Tobacco Talk” survey. The final survey of 2015 suggested a number of factors for the cigarette segment’s strong showing, including strong industry pricing power, a consumer base that continues to improve and up-trade to premium brands, continued moderation in the vapor category and solid cigarette volumes.
Wells Fargo senior analyst Bonnie Herzog noted that there was “an expected fourth quarter decline of only 1.2%, despite lapping a relatively tough year-over-year comparison.”
While retailers had plenty to say about the state of the industry overall, respondents were perhaps most vocal about the “new” Big Three tobacco companies: Reynolds American Inc., Altria Group Inc. and ITG Brands Inc.
Here’s what retailer respondents had to say about these three companies:
Reynolds: Newport Leads the Charge
Retailers continued to express optimism for Reynolds’ potential after acquiring the Newport brand, with respondents predicting Newport will gain an additional 0.95% share in 2016 (up from a 0.8% prediction in early December).
“This incremental share will likely be driven by greater participation in Reynolds’ new every-day-low price (EDLP) retailer program which is driving greater shelf space and share gains for RAI’s entire portfolio,” Herzog wrote in a research note.
“RJR gained major power with Newport,” replied one survey respondent. “It’s really a two horse race now.”
Another said, “Altria is in full panic mode with RJR's success in select states with Newport Smooth Select Gold (nonmenthol).”
Altria: Cautious Optimism for Mobile App
Herzog agreed “there are some signs of stepped-up competitive activity given Reynold’s push behind Newport and Altria defending its turf,” but also called out mainly positive experiences with Altria’s new Marlboro MHQ mobile app.
“While early days, we’re encouraged by retailers’ initial feedback on the app,” she said, adding that 51% of the “Tobacco Talk” respondents had used the app in their stores.
Respondents praised the improved customer engagement, ease of use and positive impact on Marlboro, but expressed concerns about the narrow consumer segment the app targets, as well as the fact that it conditions consumer to buy on coupon.
“The benefits are for techies,” said one such respondent. “We are seeing an increase in the mobile coupons, but not enough to write home about.”
“It is beginning to teach tobacco consumers to use their smartphones in new ways,” said another survey respondent. “When retailers are able to provide data feeds this new program offers the retailers a new point of differentiation. We are seeing some good redemption from this program.”
ITG: Continuing to Fall Behind
In the third quarter “Tobacco Talk” survey, 50% of respondents believed ITG Brands would lose cigarette share in 2016; that figure rose to 60% in the fourth quarter survey, with retailers also indicating they expect to cut back ITG’s shelf space by 1% this year (while raising Reynold’s shelf space by 1%).
“We expect ITG to be a nonplayer by end of 2016,” one retailer wrote. “They are already close to falling behind Liggett.”
“We believe ITG’s woes largely stem from a lack of focus given brand breadth and loss of leverage to powerhouses Reynolds and Altria,” Herzog said. “To counteract, ITG has increased promo support behind Winston, but retailers have yet to see the investment pay off. We believe a major strategic pivot is in order.”
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