Reynolds American touts efforts to ‘transform tobacco’

Reynolds American touts efforts to ‘transform tobacco’

The Business Journal by Owen Covington, Reporter

Date: Monday, November 12, 2012, 11:36am EST

Reynolds American says its development of new products will help the company stay competitive in the face of declining smoking rates.

Reynolds American Inc. says its focus on innovation and the development of new products will help the company stay competitive in the face of declining smoking rates.

Reynolds American President and CEODaan Delen said during Investors Day presentations Monday morning that the company is focusing over the long-term on emerging smoke-free products such as snus and its new electronic cigarette Vuse that offer larger margins and greater potential for growth.

“Everything we’re working on from an innovation standpoint has a higher margin than cigarettes,” Delen said. “I think we’re very well positioned in an evolving market.”

Officials with the Winston-Salem-based tobacco company (NYSE: RAI) said volumes have risen this year in smoke-free categories such as moist snuff and snus, particularly among younger demographics, while cigarette volumes continue to decline.

But Delen emphasized that cigarettes are still the core focus and business for the tobacco company. He offered an internal mantra of “80/90/90,” which reflects that 80 percent of the company’s resources are still in the combustible tobacco space, 90 percent of its organizational resources focus on that area, and 90 percent of its research and development budget is centered on combustibles.

“That is the category that is still going to deliver a lot of growth in the future,” Delen said, noting that the U.S. tobacco market continues to offer about a $14 billion “profit pool,” about 85 percent of which comes from cigarettes.

But Reynolds American’s strategy on “transforming tobacco” is obvious, as Delen spent substantial time talking about other categories besides cigarettes in promoting the company’s efforts toward innovation.

The company’s Camel Snus product, which is a spit-free moist tobacco product that comes in small pouches, carries more than 80 percent of the snus market and has seen annual increases in volume between 8 percent and 10 percent. By comparison, cigarette volumes are declining about 3 percent annually for the industry.

In the growing electronic cigarette category, which offers users a nicotine-infused vapor to inhale, Delen said RAI subsidiary R.J. Reynolds Vapor Co. is preparing to make a “big splash” after a limited launch of its Vuse product earlier this year.

Delen said Vuse is more of a “digital cigarette” than merely an electronic one given its use of computer chips that Delen said help offer an experience closer to that of actually smoking. Delen said Vuse is also set apart by being produced domestically, while most electronic cigarettes are produced abroad.

“We’re not looking to make a little splash in the category,” Delen said. “We’re looking to make a big splash in the category.”

RAI is also ramping up its nicotine replacement therapy sector with a nicotine gum called Zonnic that will be primarily marketed in gas station and convenience store environments, and closely mirror the price point of cigarettes.

Delen said other tobacco companies are looking at emerging markets geographically to build new consumers for cigarettes, while Reynolds American is focusing on markets centered around emerging products.

“I actually think we have the best emerging market exposure of any tobacco company globally,” Delen said. “They are very relevant emerging categories and emerging products. … This ship is going to come into balance.”

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8 comments ↓

#1 Vapor Vixen on 11.13.12 at 11:56 PM

Reynolds might think they can just introduce an e-cigarette but not at the retail they set!

#2 sdf@as.com on 11.14.12 at 7:22 AM

Vuse is a nice product. The deeming regs are going to change A LOT — decimate supply chains — change margin discussions with retailers — etc. Reynolds is perfectly sensible to proceed with caution — when the playing field is set they will offer a fair-value proposition for all (and by fair I don’t mean this piggish margin situation that currently prevails for retailers), imho.

#3 SNUS GUY on 11.14.12 at 11:31 PM

I hear that Reynolds is beginning to work on distribution!

#4 Candy Girl on 11.14.12 at 11:45 PM

There is no question that FDA regs via a deeming regulation are going to markedly change and disrupt the e-cig supply chain. The big tobacco companies are poised to succeed in this space at the expense of the e-cig pioneers who remain poorly capitalized and incapable of producing a product without flaws and defects and incapable of marketing these products without hyperbole and without besmirching their competitors in the same space.

#5 OTP Kid on 11.15.12 at 11:14 AM

Ahhhh, good old RJR. These jokers couldn’t win a horse race if there’s was the only one running in it. Lest we forget, these are the same people that leterally invented what is now called the ecig when they invented Premier in the 1980’s which was the same concept with a different ingnition mechanism; in fact, I wouldn’t be surprised if they revived some of their old patents for Vuse.
I’m pretty sure they will be entertaining to watch. Please see Camel SNUs, Doral, Winston, Salem, More, Now, Vantage….

#6 Observer on 05.28.13 at 9:28 PM

I tried one of Reynolds VUSE e-cigarettes. Really needs a lot of work. It’s better than a lot of the low end product and the inexpensive soft tip king like product but really needs work to compete with the better units on the market. Disappointing.

#7 OTP Kid on 05.31.13 at 12:22 PM

I just tried a VUSE. How RJR can think anyone willl buy this steel tube that weighs 3x as much as the other ecigs is beyond me. It’s like Pontiac thinking someone might buy the Aztek

#8 Cigarman on 06.01.13 at 12:50 PM

I was traveling a couple of weeks ago after the NATO show and I heard Bonnie Herzog speak about this product and also read all the Reynolds reports and was like i really need to try it. Well my summation and I’ve tried an awful of ecigs is the following: Are we sure this product is the product Reynolds is reporting about? The product really does not measure up to the hype. Very little throat hit and I found that the product weakened rather quickly after about 50 puffs. Extremely expensive and I agree why would one buy this product other than a one who owns Reynolds stock.

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