Survey: Uncertainty Over Reynolds-Lorillard Deal

Retailers remain divided on the new No. 2

Published in Tobacco E-News

By
Melissa Vonder Haar, Tobacco Editor

Camels and Newport Cigarettes

OAKBROOK TERRACE, Ill. -- Back in May, when a merger of Reynolds American Inc. and Lorillard Inc. was mere speculation, a CSP tobacco survey showed that retailers were incredibly divided on whether this potential new No. 2 player would be good or bad for their tobacco sales: 37% said the deal would have a positive effect, 33% predicted a negative effect, 15% said be no effect and 15% were unsure (full story here).

In a case where certainty has only bred more uncertainty, retailers appear to be even more divided now that the Reynolds acquisition of Lorillard has been finalized: in a July RBC Capital Markets/CSP tobacco survey, 27% of retailers expressed positivity about the deal’s impact on business, 32% were negative and a whopping 41% were mixed. This mixed response echoed what retailers have publically expressed to CSP.

Survey respondents and other retailers who have expressed positivity over the deal mostly zeroed in on how an improved No. 2 player could provide better competition for top dog Altria, perhaps lessening the squeezed margins and strict contracts that have plagued tobacco retailers in recent years.

“This should be a plus for the retail community,” Steve Monaco, director of category management for Rockland, Mass.-based Tedeschi Food Shops, told Tobacco E-News. “Altria will need to look over their shoulders more often and pay more attention to their competition. The combination of Reynolds and Lorillard will mean one less contract that will need to be scrutinized for shelf placement and allowances.”

While those on the “negative” side agreed that the combined Reynolds-Lorillard could better stand up to Altria, these retailers believed a more powerful Reynolds could result in stricter contracts across the board.

“Every time we’ve seen consolidation it usually doesn’t benefit retailers,” said Andrea Myers, president of Kocolene Marketing LLC., Seymour, Ind.  “I’m concerned that less competition will impose more restrictions on retailers.”

One survey respondent predicted Reynolds will now “require more space on our rack and allow them to hold more of our money.”

This would be very bad news for retailers dependent on higher-margin value and sub-generic brand cigarettes, according to director of retail operations for the Wheeling, W.Va.-based Tri-State Petroleum, Frank White.

“I think that this is going to put pressure on retailers to eliminate other brands that deliver greater margin dollars,” White told Tobacco E-News. “Brands like Sonoma from Imperial, Liggett, from Liggett Vector generally allow greater cents-per-pack profit due to the Pall Mall EDLP contracts.  Once the space work is done, what is left for higher profit items like these and the specialty premium items like Djharum?”

As for the majority, who remain uncertain as to what—if any—affect this deal will have on their business, many posed questions as to how Imperial will perform as the newly-minted No. 3 player.

“Imperial's addition of the Winston, Kool, Salem, (and) Maverick brands along with the addition of blu to their folio really piques ones interest, especially with the addition of the existing Lorillard field sales team to support any programs created or offered,” wrote one survey respondent. “Depending on the strategy adopted by the new No. 3, this could have a long term positive impact.”

Others said it would be impossible to tell what the merger will mean for business until the deal is approved by both the U.S. Federal Trade Commission (FTC) and the Reynolds board.

“No one really knows,” responded one such retailer. “It will be interesting: there are a lot of unknowns.”

“In any case, the next six months will be interesting,” White said, echoing such sentiments.

Or, as one survey respondent summed it up: “It’s too early to tell, but I am sure it will involve resets.”

Keywords: 
cigarettes, M&A