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November, 2008

SMOKE Magazine - Cigars, Pipes, and life's other desires

Innovation Drives Strong Company Performance for Reynolds American (RAI)

By Suzanne J. Brown

No Longer Is RAI Just Blowing Smoke...

New products, packaging, and innovation highlighted 2007 and continue throughout 2008. In her annual letter to shareholders, Reynolds American Chairman, President, and CEO, Susan M. Ivey, reported net sales increased by 6%, surpassing $9 bn. Double-digit operating income growth and an 8.1% increase in net income allowed the company to report earnings per share of $4.43, an increase of 8 points over the previous year. Ivey credits the company’s sold results to the 7,400 employees of Reynolds American and its four operating companies: R. J. Reynolds Tobacco Company; Conwood Company, LLC; Santa Fe Natural Tobacco Company, Inc.; and R.J. Reynolds Global Products, Inc.

In September of this year, RAI was recognized as a leader in corporate sustainability by being awarded membership in the 2008–09 Dow Jones Sustainability North America Index (DJSI North American). With this membership, RAI became the only US tobacco company, and one of only 125 North American companies, on the index.

Companies are selected based on an extensive evaluation of many criteria including corporate governance, stakeholder relations, human resources development, knowledge management, energy consumption, and climate change strategies.

In an industry where competition overwhelms and negative issues stifle, RAI seems to tighten its seatbelt and ride the bumps through strategic planning by streamlining its operations and applying innovation to both traditional products, and launching new ones in the smokeless category.

R.J. Reynolds Tobacco Company
According to Daniel M. Delen, Chairman, President, and CEO of R.J. Reynolds, second-quarter profits and margins were up from the prior year due to higher pricing and continued productivity improvements, along with higher levels of undiscounted wholesale inventory. The impact of these factors more than offset a second-quarter cigarette volume decline of 7.9% from the prior-year period. More than 40% of that decline was due to lower volume from the company’s non-support brands, including a number of lower-priced, lower-volume brands that R.J. Reynolds discontinued late last year.

R.J. Reynolds’ second-quarter operating profits of $523 mn were up 5.4% from the year-ago quarter. The company’s operating margin was 25.7%, an improvement of 1.7% points from the prior-year’s period. Total company market share of 28.1 was down 1.1 share points from the prior-year quarter; however, R.J. Reynolds continued to increase its total growth-brand market share, and the company is generating additional productivity and profit gains.

David Howard, Spokesman for R.J. Reynolds Tobacco, said the company’s focus is two fold: products, packaging, and innovation for cigarettes; and to become more than a cigarette company, a total tobacco company that provides more opportunities to adult tobacco users.

As the smokeless tobacco niche continues to grow, Camel Snus is growing sales in this category with its most recent product. Packed 15 pouches to a tin, Camel Snus are manufactured using a Swedish process, where the product is finely milled and pasteurized. In fact, Snus is the Swedish word for snuff. For tobacco users, the satisfaction derived from products made using this process has gained first place status for men in Sweden.

Further differentiation comes from selling Camel Snus cold in an on-counter or back-bar refrigeration unit, ensuring freshness. In an effort to provide products that adult tobacco consumers want and offer more opportunities to use, R. J. Reynolds went to the source, tobacco consumers. Howard said, based on their feedback, adult tobacco consumers are looking for:

  • Products that provide tobacco pleasure
  • Products that can be used around non-smokers
  • Products that don’t litter or offend
  • Products that can be used in more places than cigarettes; i.e., work, restaurant, movie and on public transportation.
New packaging for R.J. Reynolds’ brands like Pall Mall, Winston, and Doral, gives the brands a modern look while maintaining each brand’s familiarity and product protection. The new “boxed style” with rounded rather than square corners gives an upscale feel. For both Winston and Doral, the new two-way opening method flips in the traditional way and also opens like a soft pack.

With a squeeze on the filter, Camel Crush offers adult smokers the option of a menthol or regular cigarette. A small, gelatin-like capsule is in the filter, and when squeezed, releases the menthol. By having control over whether and when to initiate the menthol taste, Howard says the option gives adult smokers a choice through interaction. Introduced last April in several markets in Pennsylvania, Camel Crush is now available in markets throughout the US.

Conwood Company, LLC
As of July 30, 2008, Conwood continued to gain momentum as the growth leader in the rapidly growing moist-snuff category, reporting record profits, volume, and share in the second quarter.

Conwood’s second-quarter share of 27.8% was 2 share points higher than the year-ago period. Total company volume was up 18.4%, on the strength of Grizzly’s 25.6% volume increase in the second quarter. Operating profit of $96 mn dollars was up 5.5% from the prior-year period.

According to a management report, Grizzly Snuff and Grizzly Wintergreen Pouches are among the most successful new products in the moist-snuff category the company has seen during the past several years.

While Grizzly continues to grow volume and share, Conwood’s premium Kodiak brand had a difficult second quarter with volume and share declines. That reflected increases in the relative level of competitive promotion and the fact that Kodiak’s strength is concentrated in states with high tobacco taxes and tough economies. Conwood continues to focus on strengthening Kodiak’s performance. Combined with Grizzly’s growing strength, Conwood expects to deliver strong earnings and volume growth again this year.

Santa Fe Natural Tobacco Company Santa Fe Natural Tobacco Company posted a strong year in 2007. Its highly profitable Natural American Spirit brand achieved a major milestone by reaching a 0.5 share of market nationally. Natural American Spirit has its strongest appeal in major metropolitan markets, and in some of those areas the brand has a 3 to 4% share of market. Santa Fe invested in its business in 2007, including more than tripling the size of its sales force to gain broader distribution of and greater visibility for Natural American Spirit. R.J. Reynolds Global Products is working to broaden the availability of Natural American Spirit outside the United States. Global Products expanded the brand’s presence in key markets in Europe and Japan in 2007.

About Reynolds American, Inc. br> Reynolds American, Inc. is the parent company of R.J. Reynolds Tobacco Company; Conwood Company, LLC; Santa Fe Natural Tobacco Company, Inc.; and R.J. Reynolds Global Products, Inc. R.J. Reynolds Tobacco Company is the second-largest US tobacco company. The company’s brands include five of the 10 best-selling US brands: Camel, Kool, Pall Mall, Winston, and Doral. Conwood Company, LLC is the nation’s second-largest manufacturer of smokeless tobacco products. Its leading brands are Kodiak, Grizzly, and Levi Garrett. Conwood also distributes a variety of tobacco products manufactured by Lane, Limited, including little cigars and roll-your-own tobacco. Santa Fe Natural Tobacco Company, Inc. manufactures Natural American Spirit cigarettes and other additive-free tobacco products, and manages and markets other super-premium brands. R.J. Reynolds Global Products, Inc., directly or through others, manufactures, sells, and/or distributes American-blend cigarettes, including Natural American Spirit, and other tobacco products to a variety of customers in selected markets outside the United States. Copies of RAI’s news releases, annual reports, SEC filings, and other financial materials are available at www.ReynoldsAmerican.com.

Tobacco International - November, 2008

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