A Competitive Third Quarter for Big Tobacco

Published in Tobacco E-News

Key Q3 earnings trends: cigarettes down, smokeless and Menthol competition up

By  Melissa Vonder Haar, Tobacco Editor

NEW YORK -- Altria, Reynolds American and Lorillard all released third quarter earnings this past week, providing perspective on how the top tobacco companies performed--and what these performances may indicate for the final quarter of 2012.

“With all tobacco companies having reported, the key themes … emerged from Q3,” Andrew Kieley, a research analyst for New York’s Deutsche Bank, wrote in the Oct. 26 report “Tobacco Wrap For Q3.”

Such trends included the expected: Cigarette volume was down 3% to 3.5%, with Altria’s volume up 1.2%, Lorillard’s down 2.1%, and Reynolds’ falling 6.9%. To counteract low volumes (in part due to trade outlets carrying lower inventories), Kieley reported cigarette pricing was modestly up: Lorillard led the charge, with pricing up by 5.4%, followed by Reynolds (up 2.9%) and Altria (up 1.4%).

So what does this mean for cigarettes in the fourth quarter?

“Promotion is very competitive into Q4, and is pressuring the stocks, but we don’t expect a war,” said Kieley. “Players are fighting for share, especially in menthol, but are incented to stay rational.”

Kieley went on to describe Lorillard as the “most cautious” of the big three, with a need to narrow Newport’s gaps, and observed that Reynolds is putting more emphasis on Pall Mall menthols.

“(Altria) is driving the bus, and did not alter its stance,” Kieley said. “Management reiterated profit-focus, that this is a somewhat unique year of new SKUs, and it is gradually easing promotion. We expect a round of pricing in November to December, but it will be key to monitor promotions during Q4.”

And while cigarettes are competing to keep volume from further plummeting, at least two major players are seeing smokeless competition grow the segment: Kieley reported volume was up 6.6% for Reynolds and 5.9% for Altria, which plans to release another smokeless innovation in Q4 with Skoal Readycut.

With cigarettes on the decline, such innovation is a crucial factor to success in the overall tobacco category, an area Altria has tended to dominate, although Kieley believes the company may face some heightened rivalry.

“Innovation edge remains with (Altria), with (Reynolds) picking up the pace,” Kieley said. “(Lorillard) is still hamstrung by FDA, but is leading the charge on e-cigarettes.”