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    The Resurgence of Combustible Cigarettes Continues

    Low gas prices fuel uptrading to premium.

    NEW YORK — Traditional cigarettes have been making a comeback in 2015.

    According to Wells Fargo Securities LLC's latest Tobacco Talk survey, the overall combustible cigarette environment continues to remain robust "given a renaissance in combustible cigarettes, with industry volume expected to be down slightly — less than 1 percent — in the third quarter, lapping a relatively tough year-over-year comp," said Bonnie Herzog, managing director of beverage, tobacco and convenience store research.

    Tobacco Talk surveys tobacco retailer and wholesaler contacts representing 30,000 convenience stores in the United States.

    The survey also found continued strong manufacturer net price realization of around 6 percent in the third quarter driven by continued uptrading to premium brands due to lower gas prices, a stronger tobacco consumer and lower promotion spend.

    The segment is also benefiting from a stable competitive environment, according to the majority of Wells Fargo Securities' contacts, "but things should get interesting on Nov. 16 with Reynolds American Inc.'s (RAI) new everyday low price (EDLP) contract, which now includes Newport as we expected," Herzog said.

    Traditional cigarettes are also seeing a lift from moderating vapor category growth with several consumers becoming disillusioned by electronic cigarettes and making the switch back to combustible cigs, "again highlighting that stepped-up innovation is critical for the long-term success of this category," she explained.

    The Tobacco Talk retailer contacts also expect positive changes on the horizon for Newport, including new line extensions, stepped-up advertising and a strong promotional push. 

    "Importantly, as we expected, RAI added Newport to its EDLP program which will likely encourage greater retailer participation," Herzog said, noting participation is currently around 60 percent.

    According to one retailer, "[R.J. Reynolds Tobacco Co.] will seek to leverage Newport in getting retailers inked to EDLP contract." 

    This should enable RAI to more tightly control and manage its growth brand pricing structure, as well as gain incremental space for Newport, which could ultimately drive greater market share, profitability and accelerated growth for Newport, as well as RAI's entire portfolio, she explained.

    Looking at The Altria Group Inc., retailers are broadly encouraged by the new Marlboro Midnight, a menthol product that will likely be targeted to a younger demographic. 

    "Also, we're encouraged by Altria's plans to leverage digital media with its new Marlboro app," Herzog added.

    On the other hand, more than 50 percent of retailers believe ITG Brands will lose cigarette share, primarily due to lack of focus given too many brands, and RAI's and Altria's position of power, according to Herzog.

    "However, ITG is expected to get aggressive with promotions on its recently acquired brands, specifically Winston," she said. "Further, the bulk of our contacts predict an uphill battle for blu to succeed under its new ownership."

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