"Hot" does not begin to describe Reynolds American Inc. (RAI). The holding company holds the #2 spot among US makers of cigarettes and smokeless tobacco through subsidiaries RJR Tobacco and American Snuff. RJR Tobacco produces many of the top-selling cigarette brands: Camel, Doral, Kool, Pall Mall, Salem, and Winston. It also makes and markets smoke-free Camel tobacco products. American Snuff offers moist snuff under the value-priced Grizzly and the premium Kodiak brands. RAI businesses include cigarette maker Santa Fe Natural Tobacco and nicotine gum maker Niconovum. RAI is the result of a merger of R.J. Reynolds Tobacco and Brown & Williamson, a subsidiary of British American Tobacco that owns 42% of RAI.
RAI is intent on setting itself apart from the pack of tobacco makers, as well as strengthening consumer loyalty, through aggressive pricing, branding and packaging, and product extensions. Following more than a 25% decline in year-over-year net income in 2009, RAI maintained earnings momentum, increasing by 15% and 27% in 2010 and 2011, respectively, on sales that remained flat in 2011 over the prior year. Sales of the company's flagship business segment, RJR Tobacco, were impacted by a 7% slip in cigarette volumes and a lackluster mix of premium- and value-brand offerings (offset by higher pricing).
On the bright side, the company has benefited from Camel's filtered styles, which are sold in two menthol versions. Camel's share of the menthol market is rising, buoyed by the introduction of Camel Crush Bold in the third quarter of 2011 -- the company's first cigarette line extension since the Crush style launched in 2008. In addition, Camel Snus (small pouches filled with tobacco that users stick between the cheek and gum) continues to grow, bolstered by expanding consumer awareness for smoke-free products. RAI also cites a growing preference by thrifty consumers for Pall Mall attributable to its positioning as a longer-lasting cigarette.
The increasing use of moist snuff along with higher prices fueled year-over-year sales of American Snuff in 2011, specifically its value-priced Grizzly brand. Results, however, were dampened by rival promotions and premium pricing pressures, which hurt the performance of premium brand Kodiak.
Meanwhile, RAI's earnings are lifted by efforts to maximize cigarette manufacturing efficiency coupled with a focus on smokeless tobacco production. In spring 2011 the company sold off its Lane Limited subsidiary for $205 million to Scandinavian Tobacco Group, a Danish pipe tobacco company. Lane Limited, based in Georgia, makes roll-your-own tobacco under the Kite and Bugler brands, as well as Captain Black pipe tobacco; its absence impacted American Snuff's sales and earnings. Concurrently, American Snuff has invested its chewing tobacco processing and manufacturing facilities in Tennessee. A new Memphis plant with more efficient automated equipment completed construction to begin operation in 2012.
Restructuring efforts have included closing its Whitaker Park cigarette factory and consolidating production at the Tobaccoville facility in Forsyth County, North Carolina, or locations overseas. (Additional demand has extended the factory's closure to mid 2012.) The cost-saving moves come in the wake of Altria's acquisition of UST (American Snuff's largest competitor). The deal bumped RAI down from the #1 spot to the #2 spot in the smokeless tobacco market.
RAI is also strategically, albeit gradually, diversifying its portfolio beyond tobacco. In late 2009 RAI acquired Niconovum, AB, a Swedish maker of smoking cessation products, for about $44 million. Niconovum's nicotine replacement therapy (NRT) items include nicotine gum, mouth spray, and pouches, and are sold in Sweden and Denmark. – less