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WINSTON-SALEM, N.C. — Retailers are already preparing for changes that may come once the Reynolds American Inc. (RAI)-Lorillard Inc. merger gets the final stamp of approval.
According to Wells Fargo Securities LLC's latest Tobacco Talk survey, one change could be the inclusion of the Newport brand in RAI's Every Day Low Price retailer program (EDLP).
Survey respondents, representing nearly 40,000 U.S. convenience stores, believe RAI will leverage Newport to grow its EDLP program, up from the roughly 60-percent retailer participation it currently has. This would enable Reynolds to more tightly control/manage its growth brand pricing structure, ultimately driving greater market share and profitability overall, and importantly accelerate growth for Newport, according to 65 percent of Wells Fargo Securities' retailer contacts.
"Therefore, if Reynolds includes Newport in its EDLP program, retailers should have a greater incentive to join, although some feel they may have 'no choice' given the importance of Newport despite this program being voluntary," said Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities. "Regardless, if Reynolds chooses not to include Newport in its EDLP or is potentially restricted from doing so, we believe Reynolds' superior execution at retail will enable it to drive faster share gains for Newport."
The latest Tobacco Talk survey results have strengthened Wells Fargo Securities' conviction that the Federal Trade Commission (FTC) will likely soon approve the pending merger. According to Herzog, "an overwhelming 98 percent of retailers expect the FTC to approve the deal."
Some retailers are expecting minor modifications or additional brand divestitures because several believe it will be challenging for Imperial Tobacco Group to "maintain share," she added. RAI has entered into an agreement with Imperial Tobacco under which Imperial has agreed to purchase the KOOL, Salem, Winston, Maverick and blu eCigs brands, as well as other assets and liabilities for $7.1 billion in cash.
"Based on numerous conversations with retailers and continued review of the FTC's key questions, it appears a sticking point has been whether Imperial and some of the smaller manufacturers will be able to effectively compete," Herzog explained. "Despite this hurdle, we believe RAI and Lorillard's agreement to extend the normal 30-day waiting period should be viewed as positive and could suggest negotiations are progressing toward ultimate FTC approval of the deal 'as-is' or with very minor modifications to ensure Imperial will have a '"fighting chance.'"
One key consideration by the FTC could be RAI's EDLP retailer program and how it may or may not create shelf space constraints for Imperial.
"The majority of our retailer contacts do not expect the FTC to require changes to Reynolds' EDLP for the deal to be approved and expect Newport's growth will accelerate if added to this program," she concluded.