Retailers Back Reynolds Purchase

Poll respondents say Conwood purchase a wise move, await next step by Philip Morris

Published in CSP Daily News

OAK BROOK, Ill. -- CSP Daily News readers overwhelmingly agree that Reynolds American Inc.'s move into the smokeless-tobacco category was a smart one and that Philip Morris USA will make a similar move in the near future.

Retailers are similarly buoyed by Reynolds American's purchase of Conwood, as illustrated by comments made by ConocoPhillips' Zane Power during a CSPNetwork CyberConference, How's Your OTP Business. Reynolds has actively been trying to get into this business, and I think they've got a great idea with a Camel-branded tin. With the ability [image-nocss] to have a major brand such as that, I think it made sense for them, he said. Conwood has great field-support personnel; that's one of their strengthsand I think it'll end up being a win-win for them. [To view an OnDemand replay of the CyberConference (free; retailers and wholesalers only), click here.]

A full 70% of the respondents to a Kraft/CSP Daily News Poll said the purchase, which gives Reynolds American Inc. (RAI) control of such moist-smokeless-tobacco brands as Kodiak and Grizzly, was a wise investment. Some 14% said the purchase was not a wise investment, and 16% chose the cautious response of We'll see.

Similarly, 93% of respondents to a followup poll said they expect Philip Morris USA (PM USA) to make a move into the smokeless-tobacco category soon. Most (44%) thought that move would be made through an acquisition, while 15% think PM USA will make the move organically with the introduction of its own line of products. Some 34% said PM USA would use both methods (acquisition and introduction of its own line), while the remaining 7% doubt the company will make such a move anytime soon.

Some tobacco stock analysts have suggested PM USA, the largest cigarette manufacturer in the United States, might make a play for the No. 1 smokeless-tobacco company, United States Smokeless Tobacco Co. (USSTC). Attempts to reach Philip Morris for comment were unsuccessful, and USSTC spokesperson Mike Bazinet would not comment on rumor or speculation.

However, Bazinet did offer the company's opinion of the Reynolds/Conwood deal. Our feeling is that it validates what we've been saying for many years, and that is mainly that smokeless tobaccoand principally, moist snuffis one of the fastest-growing consumer-packaged-goods categories, he told CSP Daily News. Conwood has already been a vigorous competitor in the market place, and we don't think this acquisition is really going to change that.

The RAI purchase came just as PM USA's parent company, Altria Group Inc., issued its first-quarter 2006 earnings report. Even with Americans taking fewer puffs, the Richmond, Va.-based PM USA is churning out sales and profits for its parent company, according to a report from the Associated Press. And it's doing so by beating back discounters, regaining pricing power and pushing its dominant Marlboro brand farther ahead of the pack.

Last week, Philip Morris USA emerged as the star of Altria's first-quarter earnings, reporting a nearly 8% increase in operating income while Philip Morris International and Kraft Foods Inc. struggled. Its sales rose about 4% to $4.32 billion.

How long PM USA can sustain its growth in a shrinking market is another matter, the AP report states. The tobacco company still faces several large lawsuits. And thanks to falling consumption and inflation costs, it must generate minimum income growth between 3% and 5% just to stay even with the prior year's results.

In the United States, cigarette volumes have declined by an average annual rate of 1% to 2% in the past two decades due to health concerns, smoking restrictions and rising prices. In the meantime, inflation has averaged about 2% to 3% a year, though PM USA noted that it agreed to a 3% minimum inflationary adjustment on payments to states as part of the 1998 Master Settlement Agreement.

Tobacco stock analyst Bonnie Herzog of Citigroup will discuss the recent changes in the industry landscape during a Tobacco Update CSPNetwork CyberConference on Tuesday, May 16. Click here to register.