Reynolds American Hopes New Products Will Improve its Position on the Market

January 16th, 2013 00:00

Reynolds American advertised a range of new smoke-free products that are affecting the local market, actions that should increase the tobacco manufacturer’s aggregate results while maintaining consumers in the category.

The company’s new products, which include electronic cigarettes and diverse nicotine replacement therapies, are being introduced as Reynolds American faces a complicated operating environment due to declining demand for regular cigarettes. Cigarette volumes have been falling for years, mostly due to a weak economy and increased unemployment that significantly affects consumer disposable income.

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Reynolds American has encountered higher challenges in recent quarters than its largest competitors as Altria and Lorillard. Reynolds American, the second domestic cigarette producer after Altria, has presented lower cigarette market share for the past six quarters.

Altria’s portfolio is much more diverse with a wine business and a subsidiary that owns direct finance leases. Lorillard occupies the leading position on the market for menthol cigarettes, which are popular among teenagers.

Reynolds American boosts profitability by cutting costs and raising prices, and also sees beneficial to operating margin by introducing new smoking products. President and Chief Executive Daniel Delen, declared in an interview that cigarettes have the lowest operating margin of all products they sell. That means the more and diverse products Reynolds American launches on the market and sells, the greater the possibility to support profitability. Mr. Delen stated that the company’s new nicotine replacement products and digital cigarettes that are appearing on the market have to control higher margins within the long term than regular cigarettes.

Reynolds American is aiming at approximately 50% for the new novelties – above the 35% Reynolds American announced in the 3Q. Mr. Delen also added that generally smokers will consume digital cigarettes, just to try and then switch again to purchasing regular cigarettes. Despite the fact that about 80% of the smokers over the age of 21 do not know anything about electronic cigarettes, Reynolds American announced that only 5.5% of those over 18 years old have acknowledged trying those products. This demonstrates that there is positive chance that more smokers will try e-cigarettes. Mr. Delen also confirmed that customers have also concentrated on key brands as Reynolds American’s Camel and Pall Mall, rather than switching to low-price products.

Reynolds American’s shares have closed at 1.5% to $40.67 at the recent trading. The stock has declined 1.6% in 2012.

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